Short sellers made a fortune everywhere this year except energy

Short sellers have made $405 billion betting against the market in 2022, earning mark-to-market profits in all but one sector: gravity-defying energy.

Skyrocketing oil and gas stocks have burned short sellers to the tune of $18 billion this year, according to S3 Partners data, forcing money managers betting on a correction in the best-performing sector in the economy to cover their positions in October.

The excessive losses drove about $1.1 billion in short-covering this month, according to Ihor Dusaniwsky, S3 Partners’ managing director of predictive analyst.

Bearish bets against energy stocks hit a two-year high at 3.9% in September, according to S&P Global Intelligence. The sector has soared over 58% so far this year as fuel costs rose, making it the only group in the S&P 500 index to advance and amid a 19% drop for the benchmark gauge. Energy was the third-most shorted sector in the market on bets that a recession could tip oil prices downward.

Yet, energy stocks have not stopped their market-beating rally, climbing more than 20% in October as the best-performing S&P sector this month and causing additional pain for traders wagering on a decline.

Investors piled into losing short bets in the sector, especially the large integrated firms, such as Occidental Petroleum Corp., Exxon Mobil Corp. and Chevron Corp. Each of those stocks climbed. And if the energy rally continues, S3 expects to see more short covering.

“Wrong side short bets lost 37.5% while winning short bets only returned 12.5% in 2022,” Dusaniwsky said. “Unless short sellers were great stock pickers, even a portfolio of short energy stocks was a losing proposition.”