U.S. Energy Stocks Short Interest Highest level since October 2020, are The Shorts Right?

Short interest in U.S. energy stocks has risen to the highest level since October 2020, to 3.9% according to S&P Global Market Intelligence. Markets are heading into the third quarter energy earnings season with Oil Service giant Schlumberger and Oil majors Exxon and Chevron due up in the next few weeks. The S&P 500 Energy sector is up the only sector up year to date with the S&P 500 down -22.5% year to date. Natural gas prices have lost nearly half their value from recent highs, oil prices are off around a third. The bets are that Energy stocks will be the last to fall in a climactic bear market and that the global recession will destroy demand.

XLE v SPX

Short interest in U.S. energy stocks at 3.9%, compares to the average short interest for the entire S&P 500 at 2%, according to S&P Global Market Intelligence.

Within the energy sector,

  • Most shorted drillers, refiners and oil and gas marketers
  • Least shorted transportation and storage companies.
S&P 500 YTD Oct 20 2022
XLE v SPX YTD Oct 20 22

Energy Sector Risks and What Ifs

What if energy prices are near their lows, or is this the beginning of the end like we saw in aluminium prices for example?

  • We have conflicting moves from the OPEC+ cartel decreasing production 2mbpd and President Biden looking to sell even more SPR crude. The intent is clear there for both sides, who wins?
  • The USD dollar is at massive highs, the dollar yen trading over 150 for the first time in 30 years this morning. Does that continue or is that near a high.
  • Will central banks continue to rise and keep that interest rate spread wide that is supporting the buck
  • Optionality, how big is the put and call volume at different strikes?
  • How Long or short is the market, is it a crowded trade?
  • Contagion? What is the relationship to other money assets, indices or derivatives?
  • Debt market. Interest rates are soaring. U.S. Treasuries sold off yesterday, lifting lifted yields on all tenors to fresh highs for the year after the completion of a dismal $12 billion 20-year Treasury bond reopening, which was met with lukewarm demand.  Secondary markets are even more depressed. Is your stock a long or short on its debt exposure?
  • The price of coal switching and the shutdown of Freeport LNG all factors in natural gas prices.
  • Record production and reduced LNG have pressured U.S. natural gas futures lower.
  • Britain and many European countries are politically in turmoil, can there be rational energy policy from this?
  • The weather, the great imponderable for energy
  • Will other global energy giants such as Woodside, Rio Tinto and BHP in Australia dominate? How will benefit from British fracking being allowed? So many questions and possible bifurcations with demand supply, currencies and geopolitics in the matrix.
  • Individual companies’ decision to move towards energy transition, to buy or sell assets. There is a real takeover risk with some names.
  • Social political risks such as the oil out moves and other social movements, how will they affect the industry.
  • We haven’t even got to Russia and Ukraine, what happens there?

Oil and Natural Gas Prices – the Overriding Risk

There are multiple influences and outcomes as we highlighted. Best advice is to put them in your risk matrix. Any decision should be based on a sound trading plan. Know your risk, use fundamentals, technical analysis, crowd and order sourcing algorithms, but be disciplined.

Trade Smart!

Source: S&P Global, KnovaWave, TC

From the TradersCommunity Research Desk