Short historic squeeze drives oil prices higher

Last weekend, I warned readers that according to the latest data from Goldman Sachsa brief massive squeeze on energy stocks was on deck.

Specifically, we noted that at a time when funds were the shortest oil on record, the broader energy space “was the most net sold sector” on the Goldman US Prime book, “driven entirely by short selling, which outnumbered long buying (6.4 to 1).”

And here, we said, it was “cue for the next mega gathering” since the last short sale of energy was the largest in the last 5 years.

Last weekend, I warned readers that according to the latest data from Goldman Sachsa brief massive squeeze on energy stocks was on deck.

Specifically, we noted that at a time when funds were the shortest oil on record, the broader energy space “was the most net sold sector” on the Goldman US Prime book, “driven entirely by short selling, which outnumbered long buying (6.4 to 1).”

And here, we said, it was “cue for the next mega gathering” since the last short sale of energy was the largest in the last 5 years.

What happened next was for the history books as Brent crude rose the most in nearly two years amid what was a historic market imbalance, with record shorts suddenly beginning to be covered. ..

… with Bloomberg’s Kamala lackeys going so far as to mockery those who actually did the right thing and traded before the inevitable muster as “tourists”, when in reality the only tourists here are the ones who expected the ridiculous drop in oil prices to persist despite Cushing nearing the bottom of the tanks (Bloomberg’s message is loud and clear: keep shorting oil if you don’t want to be qualified as a “tourist”, especially since a spike in oil and gas prices could have a negative impact on his favorite presidential candidate).

Unfortunately for Bloomberg, the energy gathering is just beginning, and not just because of the fundamentals.

Crude oil rose last week on the rapidly deteriorating situation in the Middle East. On Tuesday, spot WTI and Brent rose >5% from lows on initial headlines from the White House that an Iranian attack was imminent. Goldman’s research office noted on Tuesday that the rise in oil prices reflected a moderate risk premium as effective production disruptions were limited and spare capacity remains high. The energy complex jumped again on Thursday on news that the US was considering whether or not to support potential retaliatory strikes by Israel against Iranian energy infrastructure.

Then over the weekend, the bank’s commodity analysts released a new report (available for pro subscribers) in which they tried to calculate the impact on oil prices if Iran’s oil production were “capped” by Israel, ie:

• Assuming a 2 MB/day 6-month supply disruption to Iran, We estimate that Brent could temporarily peak in the $90s if OPEC quickly offsets the deficit and peak in the mid-$90s in 2025 without an OPEC offset.
• Assuming a persistent 1 mb/d supply disruption to Iran, reflecting, for example, a tightening of sanctions enforcement, We estimate that Brent could peak in the mid-$80s if OPEC gradually makes up the shortfall, and peak in 2025 in the mid-$90s without an OPEC offset.

But it’s not just the fundamentals: Goldman’s Prime Brokerage wrote in its latest weekly mandatory reading note (also available for pro subscribers) that “after heightened geopolitical tensions and the increase in the price of crude oil, HFs reversed course and bought US Energy shares net for the first time in 7 weeks, driven almost entirely by short covering.”

As a result, the US Energy long/short ratio rose +5% – its biggest weekly gain in nearly 5 months – to 1.36, which is in the 69th percentile over the past year and the 14th percentile over the past five years. “

That said, the short energy overhang remains stunning and suggests a much more brutal easing once the upward momentum persists for another week, and not just in energy stocks, where the short flow on Goldman’s Prime Broekrage is just off record highs. .

… but also in the oil area, because after short oil the interest rate hit a record two weeks ago as traders turned into the biggest drop in oil they’ve ever had, the amount of short covering was virtually non-existent and net exposure to managed money (ie, hedge funds) in the 4 main oil contracts (Nymex and ICE WTI, Nymex and ICE). Brent), barely breaking record lows!

Putting it all together, Goldman Energy specialist Ryan Novak writes that “energy led the week higher after exiting the prior week with aggressive PB/short selling that reversed this week, positioning managed money remains short – at historic lows. and tensions in the Middle East rising with Israel starting a ground invasion led the week +7%.

Conclusion: With record shorts now painfully tight as upward momentum ignited in the energy sector and the risk of a flashing red headline that Israel leveled Kharg Island looms, the unwinding of what until a week ago was a record short position in oil and energy stocks is just beginning. And that without Israel doing anything. However, if Israel were to take the plunge and either take out Iran’s oil infrastructure or, worse, target its nuclear industry, then the coming oil boom will make the brief 2008 Volkswagen squeeze seem like a strange hour for amateurs.

By Zerohedge.com

More top reads from Oilprice.com