Short sellers zeroed in on energy stocks last month as oil prices soared, betting that a move by crude above $100 a barrel would be a short-lived phenomenon, according to data compiled by S&P Global Intelligence.
Short interest in energy stocks climbed nearly 70 basis points, or 0.7 percentage point, since the end of November 2021 to 3.7% at the end of February — the highest since November 2020, the research company said in a Wednesday note. That compares with short interest in overall S&P 500 SPX, +2.24% companies at 2.19%, up 14 basis points since the end of 2021 (see chart below).
The short bets, in which traders sell borrowed shares of companies with the aim of buying them back later at a lower price, rose as oil futures were on a tear. The U.S. crude oil benchmark CL.1, +1.23% CL00, +1.23% jumped 13.6% in December, 17.2% in January and 8.6% in February. That was before soaring to a 14-year high to briefly trade above $130 a barrel last week as traders continued to react to Russia’s Feb. 24 invasion of Ukraine and resulting sanctions against Moscow that were seen threatening supply from one of the world’s largest energy exporters.
Oil prices fell back hard this week, with crude falling more than 20% from its March 8 highs to meet the technical definition of a bear market, as investors assessed negotiations between Kyiv and Moscow and sweeping COVID-19 lockdowns in China which may lower demand. Crude remains up 29% for the year to date.
Energy stocks, which had marched higher in lockstep with crude oil prices, outperforming other S&P 500 sectors, fell sharply this week as oil tumbled. The energy sector was down more than 6% but remains up more than 28% for the year to date, still outpacing other sectors.
Short sellers had focused heavily on oil and gas refining and marketing companies, S&P Global Market Intelligence said, with short interest in those stocks averaging 7.3% at the end of February, surpassing short interest for other industry subgroups in the energy sector.
But Arch Resources Inc. ARCH, -0.48%, a St. Louis-based coal company, was the most shorted energy company and fourth most-shorted company across sectors at the end of February. Short interest had jumped to 33.9% compared with 5.3% a year ago.
Arch Resources shares were down 10% for the week, but had likely been a source of pain for shorts. Shares remain up more than 15% for the month and over 50% for the year to date as coal prices have soared.