Energy Sector Short Sellers Get Burned — Short Squeeze Coming?

Short sellers have been hit hard by the runup in crude oil prices and stocks of companies that have a role in producing, marketing and selling energy products. Short interest in some 998 energy sector stocks tracked by S3 Partners Research totals about $67.1 billion, with the top 20 stocks accounting for $30.3 billion, or 45% of the market.

Short interest in Chevron as of March 1 totaled $3.67 billion (1.13% of the company’s total float), the highest in the sector. Pipeline operator Enbridge had the second-highest short interest total of $3.26 billion (3.66% of the float), while Exxon Mobil placed third with total short interest of $2.95 billion (0.84% of the total float).

Overall, short interest in the energy sector is up by $17.56 billion, which includes $13.51 billion in mark-to-market increases. The only industry in the sector showing any short covering was oil and gas equipment and services, with total short covering of about $548 million.

However, the situation for short sellers is getting worse. Ihor Dusaniwsky and Matthew Unterman of S3Partners write:

[O]ver the last thirty days we saw short covering in several subindustries and $448 million of net short covering in the entire Energy Sector. At the same time, mark-to-market price increases of existing short positions increased by $6.11 billion. Short sellers are finally feeling the squeeze of several months of mounting mark-to-market losses and are covering some of their exposure.

According to S3Partners’ data, these are the 10 most profitable shorts in the energy sector since the beginning of the year. Five are Russian companies that trade over the counter in the United States, one is Finnish, one is French and the other three are U.S.-based. The list is ordered by the mark-to-market dollar profit.

NameTickerAverage Short Interest (Millions)Mark-to-Market Profit (Millions)Profit
Green PlainsGPRE$283.26$16.955.98%
Aspen AerogelsASPN$37.85$13.1834.83%
Total SATOT$295.51$12.414.20%

Here are the 10 least profitable energy companies for short sellers so far in 2022. The list is ordered by the mark-to-market dollar loss.

NameTickerAverage Short Interest (Millions)Mark-to-Market Loss (Millions)Loss
Exxon MobilXOM$3,230.00$854.08−26.44%
TC EnergyTRP$1,967.00$359.62−18.28%
Baker HughesBKR$1,073.00$295.55−27.54%
Arch ResourcesARCH$551.81$264.96−48.02%

Dusaniwsky and Unterman comment:

The 44% increase in the price of a barrel of crude in 2022 has been a boon to Energy Sector long shareholders but a bust for short sellers. If crude prices continue to climb, and Energy Sector stocks along with it, short selling mark-to-market losses will continue to accumulate. And with Energy Sector shorts already down -23.8% for the year we should see a significate increase in short covering as more shorts get squeezed out of their positions. The additional buy-to-covers will push Energy Sector stock prices even higher than long buyers could do on their own – expect the rally to continue as the short squeeze helps fuel the move upwards.

They note as well that when/if energy sector stock prices pull back, “short sellers will recoup some of their losses. For those who’ve held on this long, the analysts don’t expect much short covering as short sellers wait for these stocks to regress towards the mean.” Once that happens, “expect short sellers to get more active and grease the skid downwards.”

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