Constrained by falling commodity prices and oversupply in the industry, US oil and gas companies fell under the crosshairs of market speculators, who placed huge bets against valuations of the sector’s stocks.
Short sellers have added more than $ 460 million to their short positions since the start of February, according to data from S3 Partners, a research company, the largest such movement in the industry since June 2019 , when oil prices fell bear market.
In addition, two exchange-traded funds, considered to be energy substitutes in the United States, XOP and OIH, have drawn particular attention from funds seeking to take advantage of the worsening crisis in the sector. The short interest in the two now accounts for around 40 percent of their shares, the data shows.
Investor disenchantment with US oil and gas companies is not new – but it has suddenly accelerated. The heavy debt burden in the sector, the uneven balance of investor repayments, and the inability of some producers to spend in cash flow have consistently weighed on stock valuations.
The S&P Energy Index is down 25% to date in 2020, down from 7.5% for the S&P 500, and has barely been positive over the past 10 years. Bank of America has calculated that the sector is now underperforming the wider market by the biggest margin in nearly 80 years.
Short sellers believe that the worst is imminent for energy stocks. Some have spent the past few days compiling lists of particularly vulnerable companies, reflecting a sudden negative mood change about the coronavirus among hedge funds in the United States, according to conversations with people close to these movements.
“Short sellers put a lot more money into the pot by shorting out an additional $ 462 million in energy stocks, anticipating further price cuts in the near term,” said Ihor Dusaniwsky, chief analyst. predictive in S3.
Among the shale companies targeted for shorting in recent weeks are Range Resources and Southwestern Energy, according to data from S3, the two major producers of natural gas remaining exposed to falling commodity prices.
Large short positions were also opened in the shares of Callon Petroleum and Matador Resources, two companies operating in the prolific Permian shale oil zone.
WTI crude oil, the US benchmark, fell below $ 45 a barrel on Friday to a four-year low and has dropped more than 27% since the start of the year. Natural gas prices in the United States are at historic lows below $ 1.70 per million British thermal units.
But falling commodity prices are not the only problem in the sector. The liquidation of the world market triggered by fears of economic upheaval due to the epidemic of coronavirus occurred during a period of overproduction on the energy markets.
“It’s structural,” said Yasser Elguindi, market strategist at Energy Aspects, a consulting company. “Energy stocks underperformed relative to the commodity, compared to S&P. Investors say “no mas”. They have lost confidence in management. ”
Bets against XOP, an ETF that tracks oil and gas explorers and producers, now stand at more than $ 1 billion – nearly half of its float – with a number of shares pending – 9% circuit last month and 2% this week. , according to S3.
Short interest in OIH, an ETF that tracks oil service companies, has increased 9% in the past week to $ 233 million, or almost 40% of its shares.
The decision to open larger short positions creates an opportunity for tightening if valuations show signs of recovery. But a short-term rally – or any type of recovery in the industry – will require stabilization of the coronavirus epidemic or a cessation of broader market sales, said Dusaniwsky.
“The price of crude will wag the tail of short sellers in the market,” he said.
Constrained by falling commodity prices and oversupply in the industry, US oil and gas companies fell under the crosshairs of market speculators, who placed huge bets against valuations of the sector’s stocks.
Short sellers have added more than $ 460 million to their short positions since the start of February, according to data from S3 Partners, a research company, the largest such movement in the industry since June 2019 , when oil prices fell bear market.
In addition, two exchange-traded funds, considered to be energy substitutes in the United States, XOP and OIH, have drawn particular attention from funds seeking to take advantage of the worsening crisis in the sector. The short interest in the two now accounts for around 40 percent of their shares, the data shows.
Investor disenchantment with US oil and gas companies is not new – but it has suddenly accelerated. The heavy debt burden in the sector, the uneven balance of investor repayments, and the inability of some producers to spend in cash flow have consistently weighed on stock valuations.
The S&P Energy Index is down 25% to date in 2020, down from 7.5% for the S&P 500, and has barely been positive over the past 10 years. Bank of America has calculated that the sector is now underperforming the wider market by the biggest margin in nearly 80 years.
Short sellers believe that the worst is imminent for energy stocks. Some have spent the past few days compiling lists of particularly vulnerable companies, reflecting a sudden negative mood change about the coronavirus among hedge funds in the United States, according to conversations with people close to these movements.
“Short sellers put a lot more money into the pot by shorting out an additional $ 462 million in energy stocks, anticipating further price cuts in the near term,” said Ihor Dusaniwsky, chief analyst. predictive in S3.
Among the shale companies targeted for shorting in recent weeks are Range Resources and Southwestern Energy, according to data from S3, the two major producers of natural gas remaining exposed to falling commodity prices.
Large short positions were also opened in the shares of Callon Petroleum and Matador Resources, two companies operating in the prolific Permian shale oil zone.
WTI crude oil, the US benchmark, fell below $ 45 a barrel on Friday to a four-year low and has dropped more than 27% since the start of the year. Natural gas prices in the United States are at historic lows below $ 1.70 per million British thermal units.
But falling commodity prices are not the only problem in the sector. The liquidation of the world market triggered by fears of economic upheaval due to the epidemic of coronavirus occurred during a period of overproduction on the energy markets.
“It’s structural,” said Yasser Elguindi, market strategist at Energy Aspects, a consulting company. “Energy stocks underperformed relative to the commodity, compared to S&P. Investors say “no mas”. They have lost confidence in management. ”
Bets against XOP, an ETF that tracks oil and gas explorers and producers, now stand at more than $ 1 billion – nearly half of its float – with a number of shares pending – 9% circuit last month and 2% this week. , according to S3.
Short interest in OIH, an ETF that tracks oil service companies, has increased 9% in the past week to $ 233 million, or almost 40% of its shares.
The decision to open larger short positions creates an opportunity for tightening if valuations show signs of recovery. But a short-term rally – or any type of recovery in the industry – will require stabilization of the coronavirus epidemic or a cessation of broader market sales, said Dusaniwsky.
“The price of crude will wag the tail of short sellers in the market,” he said.