Energy Stocks Face Continued Weakness

Energy shares have been struggling to keep up with the rest of the stock market this year, and there are indications that this trend may persist. Recent data from S&P Global Market Intelligence reveals that investors have been increasing their bearish bets against energy stocks in November.

To execute these negative bets, also known as short selling, investors borrow shares of a stock and sell them with the hope that the price will drop. This allows them to repurchase the shares at a lower price, ultimately returning them to the original owner.

The percentage of borrowed shares in energy companies listed in the S&P 500 rose to 3.71% by the end of November, up from 3.43% the previous month. Although this increase may seem relatively modest, it was the second-highest jump across all sectors in the index, surpassed only by communications services. Short selling activity in energy stocks is now at its highest level since October 2022.

Overall, short interest in the S&P 500 stands at 2.51% of outstanding shares. Only healthcare and consumer discretionary stocks have a higher percentage of short bets against them compared to energy stocks.

Some of these bearish bets against energy have likely yielded positive results. Oil stocks have performed mediocrely this month, with the Energy Select Sector SPDR Fund trading flat while the S&P 500 has enjoyed a 4% increase. Specific subsectors within the energy industry, such as oil refining, have experienced a decline in value this month.

Within the energy sector, there are specific areas that face even greater pessimism. Short bets against coal and consumable fuels, for instance, have risen from 5.04% to 7.17%.

Coal Stocks Face Uncertainty in the Future

The performance of coal stocks has been mixed in the past month. Arch Resources has seen a rise of 5%, while Peabody Energy has risen 2%. On the other hand, Alliance Resource Partners has experienced a decline of 8%. Despite this, the future of coal looks uncertain.

According to the International Energy Agency, coal consumption is expected to reach a record high this year. However, there are indications that it will start to decline in the following year.

Short Interests in Oil and Gas Drilling

Oil and gas drilling, which includes stocks like Diamond Offshore Drilling, as well as refining and integrated oil and gas companies, also have short interests above 5%.

Notably, some energy companies have attracted significant short bets from investors. Vertex Energy, Vital Energy, and Transocean hold the top positions with short interests of 21.30%, 15.92%, and 15.04% respectively.

Vertex Energy is a refiner of both traditional and renewable fuels. Their stock has seen a decline of 43% this year due to decreased earnings. Vital Energy, an oil producer based in Tulsa, Oklahoma, has also experienced a drop of 6% in their stock value this year. In contrast, Transocean, specializing in offshore drilling services, has seen a significant increase of 44% in their stock value due to rising offshore projects by oil producers.

Comparatively, Beyond Meat holds the title for the most-shorted stock in the S&P 500 with a short-interest figure of 42.14%.

Outlook for the Energy Sector

As we enter 2024, the energy sector appears to be in decent shape. Bellwether stocks such as Exxon Mobil have strong financial standings and steady growth. However, for share prices to rise, an increase in oil prices would likely be necessary. Current concerns about demand have kept crude oil prices low.

Looking ahead to the new year, the short sellers in the market may be more confident.