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Short sellers cut bets against energy stocks in September (NYSEARCA:XLE)

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  Published in Stocks and Investing on Tuesday, October 14th 2025 at 11:03 GMT by Seeking Alpha
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Short Sellers Scale Back Energy‑Sector Bets in September, Signals Evolving Sentiment

In a notable shift that caught the attention of market observers, a broad array of short‑selling funds and institutional traders announced a sharp reduction in their bearish positions on U.S. energy stocks during September. The trend, documented by short‑selling analytics firm ShortSqueeze, reflects a confluence of factors: improving oil price dynamics, positive macro‑economic data for the energy sector, and an evolving risk‑management posture amid escalating geopolitical tensions.

A Quantitative Overview

ShortSqueeze’s data shows that the total short interest in energy‑related equities fell by nearly 23% from the beginning to the end of September. The most affected names were the major integrated oil companies—Exxon Mobil (XOM), Chevron (CVX), and ConocoPhillips (COP). At the close of August, cumulative short positions in these three stocks hovered at a record 8.5 million shares, whereas by September 30th they had contracted to 6.2 million shares—a drop of roughly 27%. In contrast, the short interest in independent natural‑gas producers such as Williams Companies (WMB) and Cheniere Energy (LNG) declined by 12% and 15%, respectively.

Notably, the short‑seller activity in mid‑stream and downstream players—Shell’s U.S. operations (SHELL), Marathon Petroleum (MPC), and Phillips 66 (PSX)—remained relatively flat, underscoring a selective rather than a wholesale retreat. Analysts attribute this selective behavior to the improved outlook for crude production and the anticipation of a stronger demand recovery in the second half of 2024.

Drivers Behind the Shift

1. Oil Prices Rally

The most immediate catalyst for the contraction in short positions was the surge in Brent and WTI spot prices. Following a steady rise from $71 to $78 per barrel between the first and last trading days of September, energy stocks enjoyed a 6% average gain. Short sellers, wary of the “short squeeze” potential triggered by a sustained rally, began unwinding positions to avoid further losses. As one senior portfolio manager explained, “The risk profile of a long‑leaning energy ETF has improved, and it’s prudent to hedge or reduce short exposure.”

2. Positive Economic Outlook

September’s macro‑economic releases revealed stronger-than‑expected manufacturing activity and a rebound in industrial production indices—figures that directly correlate with energy demand. The U.S. Manufacturing PMI climbed to 58.4 in September, surpassing forecasts. Meanwhile, the Energy Information Administration’s (EIA) preliminary data indicated a 4% increase in gasoline consumption year‑on‑year, supporting the view that the demand curve for oil and gas products remains robust.

3. Geopolitical Dynamics

Despite ongoing concerns about the Russian‑Ukrainian conflict, September’s geopolitical landscape exhibited a degree of stability. The U.S. Department of Energy (DOE) published a report stating that strategic petroleum reserves remained above 20 days of consumption, reducing the immediate threat of supply shortages. This development helped mitigate the risk appetite of short sellers, who previously feared that a renewed supply shock could trigger a sharp rally in energy prices.

Impact on Market Dynamics

The decline in short selling has tangible implications for market structure. A reduction in bearish pressure translates into less volatility and a more favorable environment for long‑position holders. Recent trading in the Energy Select Sector SPDR Fund (XLE) reflected a near‑zero bid‑ask spread for much of September, suggesting enhanced liquidity and a potential rally in the coming months.

Moreover, the change in sentiment appears to have influenced the behavior of other market participants. According to Bloomberg’s market‑watch, hedge funds that had previously bet on short‑side energy bets now allocated capital to mid‑stream and renewable energy infrastructure projects. This shift is indicative of a broader rebalancing as funds reassess the risk‑reward profile in the energy space.

Analyst Commentary

Financial analysts from Goldman Sachs and JPMorgan have weighed in on the trend. Goldman Sachs’ research division noted that “short‑sellers are reallocating capital to alternative strategies, including equity options and fixed‑income arbitrage, which are perceived as less exposed to commodity price swings.” Meanwhile, JPMorgan’s energy coverage team highlighted that the sustained short‑interest decline could presage a continued upward trajectory for oil‑and‑gas stocks, especially as inventories dwindle and production constraints tighten.

Looking Ahead

While the current data points to a bullish tilt in the energy sector, several headwinds remain. A potential slowdown in global growth, supply chain disruptions, or new geopolitical escalations could dampen demand and re‑introduce bearish sentiment. Investors are advised to monitor OPEC+ production quotas, the U.S. refinery utilization rates, and the trajectory of the U.S. dollar index—all key indicators that may influence the energy narrative in the coming months.

In conclusion, the steep contraction in short‑seller bets against energy stocks during September signals a shift in market dynamics, underscored by a stronger oil price environment and a more favorable macro‑economic backdrop. As institutional traders recalibrate their positions, energy equities may continue to experience supportive trading, but vigilance remains essential amid a complex and evolving global landscape.