Hedge funds aggressively shorted energy stocks after oil prices soared

It's cold in the heights!

U.S. energy stocks have been soaring lately, with ExxonMobil hitting record highs even amid record short interest. In contrast, technology stocks, AI concept stocks and strong stocks in the early stage have faltered, and some have even retreated.

At the same time, Brent crude, the international benchmark, has risen 16% so far this year, and broke through the $90 mark last week, stirred up by geopolitical conflicts.

Just when some thought that the endless shorting campaign against energy stocks was finally coming to an end, hedge funds turned around and made a comeback.

The latest report from Goldman Sachs' prime brokerage arm noted that despite rising oil prices, hedge funds are still shorting energy stocks on an unprecedented scale, seemingly praying for a reversal before the market collapses.

Brent crude edged down 0.6% to $89.91 a barrel on Monday.

Separately, Goldman Sachs data showed that hedge funds sold off U.S. energy stocks for the third consecutive week last week, with the latter having seen a net sell-off in five of the past six weeks, and last week's sell-off was almost entirely driven by bears.

Behind the sharp rise in oil prices

高盛交易员John Flood在周日发布的Chart of the Day中指出，近期油价上涨源于需求强劲和供应风险并存。

On the demand side, our commodity strategists pointed to a combination of the IEA's 2024 oil demand forecast, strong global economic data and a revival in investor sentiment, which have boosted demand expectations.

On the supply side, rising tensions in the Middle East and attacks on Russian refineries have raised the geopolitical risk premium in oil prices.

However, the most critical point is that, as Flood said, the pattern of recent rotation of various industry sectors is surprisingly consistent with the last round of oil price surges.

The higher the price of oil rises, the more excited the bears are!

While markets have clearly begun to prepare for a return to triple digits, hedge funds have doubled, tripled, and quadrupled their chips "in the wrong direction" since the oil bottomed out in December.

Hedge funds sold off U.S. energy stocks for the third week in a row last week, according to Goldman Sachs' prime brokerage unit, which has seen net sell-offs in five of the past six weeks, with last week's sell-off almost entirely driven by bears. Oil, gas and consumable fuels, as well as energy equipment and services, all suffered net sell-offs last week.

In short, hedge funds are heavily weighted in momentum and AI concept stocks, and aggressively short in the energy sector, which is preferred for financing, and so far Goldman Sachs' primary account is 2% underweight in the S&P 500 energy sector, the lowest level in more than five years. The long/short ratio fell to 1.22, a five-year low.

At the same time, net allocations are well below historical levels – energy stocks now account for only 2.2% of our primary account's net exposure to U.S. equities, in the 3rd percentile over the past year and in the 36th percentile over the past five years.

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