Citigroup analysts remain bearish on oil, but now argue that the Ukraine situation makes a negative bet too risky.
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One of Wall Street’s only bears on the oil market decided to “step aside” on Wednesday, saying that Russia’s invasion of Ukraine has made a bet against oil prices too dicey. But other investors are ramping up negative bets on the energy sector as prices of several commodities soar to new highs.
Citigroup analysts predicted last month that Brent oil prices would fall 18% to 20% by the second half of the year, and established a short position on December Brent futures, recommending that investors sell Brent at $82.39 a barrel. They wrote that they had “high confidence” in the trade. The stop loss on the trade was $92, a level that it crossed on Wednesday as Brent futures soared to new highs. The trade lost 11.5%.
Citi remains bearish on oil, but argues that the Ukraine situation makes a negative bet too risky for now.
“While our market outlook remains out-of-consensus and we continue to project significant downside for crude oil prices in a six-to-nine-month context, the timing of this was negatively impacted from the escalating Russia-Ukraine conflict, widening supply risk premiums, and upward price momentum for the crude oil futures strip,” Citi analyst Aakash Doshi wrote. “With the potential for spot oil prices to clear $125 per barrel in the short-term, we step aside. Over the next month, there will probably be a better opportunity to either tactically or thematically short the energy market again.”
Citi’s bearish call was predicated on research that the bank says showed global production increases would surprise Wall Street, and cause prices to drop. The Ukraine conflict has added to already-existing pressures on supply, however. Escalating financial sanctions against Russia have caused supply to fall, forcing the United States and other oil-consuming countries to release supply from their strategic stockpiles. But it’s unlikely those releases will make up for the drop in barrels of oil from Russia.
Even as Citi backs away, however, there is evidence that other investors are increasing their negative bets on energy. An analysis released Wednesday by S&P Global Market Intelligence shows that short sellers have increased their negative bets to the highest level since December 2020. Short interest in energy stocks traded on all major U.S. exchanges rose to 3.49% as of mid-February, the analysis said, up almost half a percentage point from the end of November. Energy is the third-most shorted sector of the economy, after consumer discretionary and healthcare.
The most-shorted energy stock is Arch Resources (ticker: ARCH), a St. Louis-based coal company. Short interest in the company hit 35%, up from 22% a year ago, according to S&P Global Market Intelligence. Arch was hurting the shorts on Wednesday, however. The stock was up 12% as coal prices have soared.
As for oil, smaller names tend to attract more shorts. Short interest in Big Oil stocks was below the average S&P 500 stock. Exxon Mobil (XOM) had short interest of less than 1.2%, for instance, S&P Global Market Intelligence reported.
Write to Avi Salzman at [email protected]
