Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Betting on Energy's Decline Stocks See Peak Levels of Short Interest as Markets Swing

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Betting on Energy's Decline Stocks See Peak Levels of Short Interest as Markets Swing

Article excerpt

Just a few days ago, betting against energy stocks - especially using other people's shares - seemed to be a clever way to make some quick cash.

Short-interest investors flocked to oil and gas exploration and production stocks over the past few months. By mid-August, according to the latest available data, 12 percent of all the shares such companies have issued were sold short. That's more than twice the average of all industries.

Shorters identify stocks they believe will decrease in price, then borrow shares from brokers and sell them. They have an obligation to cover the loan at some point in the future.

Those who succeed at this strategy wait for the expected price drop, then buy back the requisite number of shares for a cheaper price. They can then return the shares to the lender and pocket the profit.

It is investing's traditional motto - buy low, sell high - turned on its head. For an industry like oil and gas production that is saddled with high debt, low commodity prices and a global oversupply, betting on share prices going down has become a popular direction.

That was a good place to be Monday morning when the Dow Jones industrial average shed 1,000 points soon after markets opened and closed the day down 4 percent. Oil prices dipped below $40 per barrel that day, which happened last in 2009.

Then Thursday, oil prices surged 10 percent, lifting sinking stocks and likely making shorters nervous about covering their positions.

The beaten-up stock of coal-turned-gas firm Consol Energy Inc. soared by 15 percent Thursday afternoon, after a run up in short interest in the weeks before.

In mid-August, 15 percent of Consol's shares had been sold short. At that rate, it would take investors more than four days of regular trading volume to cover their loans. When short interest holders see an increasing price signal and rush to sell, their demand further pushes up the stock price. …

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