So long $100 a barrel oil — at least that’s what a growing number of short sellers are hoping for.
Even as prices for crude oil were on pace to reach their highest level in more than a decade following Russia’s invasion of Ukraine, wagers against energy stocks rose nearly 70 basis points since November 2021 to 3.7% at the end of February. The figure placed short interest in the sector at a 16-month high, according to data from S&P Market Intelligence.
Short positions in energy companies, bets on the belief that a stock or other asset will decrease in value, grew consistently from the end of November 2021 to last month, even as an oil rally powered the sector forward in the same period.
Oil futures were already on a winning streak leading up to the commodity notching a high of nearly $139 per barrel last week on worries intensifying sanctions against Russia could disrupt global supply. Still, short sellers poured into energy stocks speculating the days of $100 per barrel oil will be short-lived.
Bets against oil and gas refining and marketing companies hit an average of 7.3% at the end of February, the most of any industry within the energy space. Coal and consumable fuel companies saw an average short interest of 6.3%, and oil and gas drilling companies followed at 5.1%.
The most-shorted energy company and fourth most-shorted company across sectors as of Feb. 28 was Arch Resources Inc. (ARCH), a St. Louis-based coal and processing company, S&P’s research showed. Short interest in the company was at 33.9%, up from 5.3% a year ago.
The uptick in bearish bets came even as short interest in the overall S&P 500 idled since soaring in October 2021. Compared to the 3.7% short interest in energy stocks, short interest in the broader large-cap index was at 2.19% at the end of February, up only 14 basis points since year-end 2021.
As discussions of a possible negotiation between Russia and Ukraine spur hopes of a de-escalation to the war, oil prices are abating from the multi-year highs seen just last week. WTI crude oil futures fell sharply to $95 a barrel as of Wednesday afternoon to fall deeper into a bear market — a decline of more than 20% from recent highs — after surging to as much as $130.50. Brent crude oil fell below $100 following a climb to $139, the highest level since 2008.
“I fully expect crude oil is going to go back towards $40 or $50 a barrel, and that’s not profound at all based on how stretched prices were,” Bloomberg Intelligence senior commodity strategist Mike McGlone told Yahoo Finance. “From this war, I think we’re going to see a significant amount of demand destruction.”
While the oil price slump extended in recent days, not all market participants are convinced the outlook for energy equities is grim.
In a note out Wednesday, analysts at Goldman Sachs predicted some oil stocks have more room to charge upward amid the backdrop of elevated prices for oil and gas.
“We continue to believe upstream energy companies are favorably set-up in the current commodity upcycle to generate double-digit free cash flow, which should allow for attractive capital returns and/or balance sheet improvement and thus allow for shares to outperform,” Goldman Sachs’ Neil Mehta wrote.
Last week, RBC Capital Markets analyst Michael Tran made a lofty forecast that it was “not unfathomable” prices could spike to $200 a barrel by summer. Still, he noted that if that happened, the move could spur a recession and send oil prices closer to $50 a barrel at the end the year.
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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
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