Short bets against energy stocks increases risk of short squeeze as oil rallies, Bitcoin falls

The possibility of another round of discussion between Russia and Ukraine and Jerome Powell’s more dovish than expected testimony saved the day for equity investors yesterday.  

At his testimony before the US policymakers, Powell said he would back a 25-bp hike in the FOMC’s March meeting instead of a 50-bp increase, giving a clear response regarding how the Federal Reserve (Fed) would position itself facing the Ukrainian war, and the prospects of a faster rise in inflation in the coming months – given that the war boosts the energy and commodity prices.  

But, as fighting inflation is the top priority of the Fed this year, Powell didn’t/couldn’t rule out the possibility of a larger move later this year, if ‘inflation comes in higher, or is more persistently high’. The higher and the more persistently higher inflation will unfortunately become the new global reality and a headache for many central banks, as they won’t be able to raise the rates sufficiently if the war take a severe toll on the economic recovery, while boosting inflation. 

Anyway, the March meeting will likely bring a 25bp hike in the US and equity investors are happy about it. 

Nasdaq: death cross formation 

The S&P500 rallied 1.86%, while Nasdaq gained 1.62% on Wednesday, but the 50-DMA finally crossed below the 200-DMA confirming a long awaited death cross formation on Nasdaq’s daily chart.  

Will we see Nasdaq fall like a castle of cards just because there is a death cross formation? No. But it could add an additional layer of bearishness to this market, on top of the prospects of higher interest rates, worsening supply chain crisis due Covid and the war, and lacking parts that the tech companies are already dealing with.  

Short bets in energy stocks rise, increasing the risk of a short squeeze 

According to S&P Global Market Intelligence, the short interest against the energy stocks has peaked to the highest levels in more than a year, as the latest rally in global energy stocks ‘may be petering out, even with oil prices surging to their highest levels since 2014’.  

Yes, but oil prices will certainly continue their journey to the north making the oil companies more profitable in the coming quarters. Therefore, the rising short bets also means a rising risk of a short squeeze, where investors who have bet for the prices to fall decide to close their positions - and closing a short position involves buying back the stock, which gives a further positive momentum to a market rally as it has been the case for stocks like GameStop and AMC last year.  

That concretely means that, if the rally in the energy stocks take the prices high enough to dissuade the short sellers, the rally could extend higher. 

Oil to the moon 

US and Brent crude continue their jaw-dropping advance this morning. The barrel of US crude just hit $116 mark, as OPEC didn’t announce any additional increase to its production regime, while the war in Ukraine gets clients to abandon the Russian oil and that increases demand for US and Brent crude.  

There is no concrete sanction against Russian oil right now – though the US wants to ban the purchases of Russian oil, but businesses prefer finding other solutions as the risk of a sanction increases parallel to the intensity of war in Ukraine. Plus, divesting and cutting exposure to Russian oil will also make it easier for the West to impose sanctions on Russian oil, if the actual sanctions don’t stop Russia from its aggressive attack.  

OPEC, a joke? 

OPEC+ decided to maintain its production target unchanged at 400’000 extra barrels per day from April. It’s a joke when you think that the Russian oil, which stands for a about 10% of the global supply is being left out, and the global oil consumption is just a touch below 100 mio barrels per day. So the 400’000 barrels don’t do much to ease the growing headache of lacking supply. But OPEC countries say that the current fundamentals and the outlook for the future points ‘to a well-balanced market’. It’s surreal, yes, but it’s the reality. The only way to solve this problem is to decrease the fossil fuel addiction, and to opt for a faster green transition! 

What’s safe, what’s not? 

Demand in US dollar remains strong. The US dollar is good safe haven play but it’s more of a last resort safe haven, for those who want to get rid of their positions and stay seated on cash waiting for the turmoil to pass.  

Before that, there is the option to stay invested and hedge positions with gold, which also performs well since the beginning of the escalation of the Ukrainian tensions.  

Bitcoin, on the other hand, becomes a risky safe haven. Even though the Russian money flows into the coin to avoid the Western sanctions, it becomes clearer that the West won’t let Bitcoin mock them and ease the power of their sanctions, and help financing the war for Russians who otherwise see the value of their currency and assets plummet at quite an unbelievable speed. Russian stocks trading in London lost up to 98% of their value in just two weeks!  

The latest news is that the US Department of Justice announced a new task force broadly designed to enforce sanctions, which will also target efforts to use cryptocurrency to evade US sanctions,  

Even though the liquidity in the cryptocurrency markets and the case of uses remain very limited compared to what has been pulled away with the traditional financial sanctions, the Ukraine war and the Russian money that flows into digital coins will sure accelerate the regulation of the crypto industry and that’s the biggest risk to the cryptocurrency performances right now. That’s even a higher risk than the tightening Fed.