Shorts Say Curb Your Enthusiasm For Energy ETFs

Oil prices topped the psychologically important $40 per barrel level on Monday, helping lift the United States Oil Fund LP (ETF) USO to a one-week gain of over 13 percent.

Energy stocks are strutting their stuff as well, as the Energy Select Sector SPDR (ETF) XLE is sporting a one-week gain of 2.5 percent.

Those statistics are clearly short-term in nature, and that might be one reason why short sellers are not shying away from the energy sector. XLE is down 20.1 percent over the past year, meaning the largest equity-based energy ETF is still in a bear market. Knowing that the sector's earnings and earnings forecasts have been dreadful could be seen as another reason short sellers would stay away on the premise that worst is baked into ETFs like XLE and their holdings. Again, that is not the case.

What Are The Shorts Saying?

European energy stocks, many of which can be found in the iShares S&P Global Energy Sector (ETF) IXC, are among the favored targets of energy short sellers.

“European energy stocks are once again being viewed in a negative light relative to others even after analysts lift earnings estimates,” said Markit in a new research note.

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“A turbulent market thus far this year has seen European stocks play their part in a global equities rally which started half way into the first quarter. At one point the Stoxx 600 was up by 14 percent from its lows but momentum has waned. Short sentiment and revised earnings forecasts highlight the changing sector expectations as companies prepare to report first quarter results.”

IXC, XLE Comparison

The $1 billion IXC allocates over 59 percent of its weight to U.S. stocks, but the U.K., France and Italy also combine for over 22 percent of the ETF's weight. Up 5.7 percent year-to-date, IXC is ahead of XLE by about 270 basis points this year.

“Short sellers are largely in agreement with analysts in the energy sector with higher levels of average short interest correlating to weaker earnings revision rankings (above). While there appears to be higher short interest in some positively ranked names, more than 70 percent of energy companies place in the bottom half of earnings revisions in Europe,” added Markit.

Commodities of all stripes soared last month, but traders used that surge to take profits in oil exchange traded products, indicating that some traders and investors see limited near-term upside for crude. Outflows were especially pronounced for futures-based oil funds, including their leveraged counterparts.