FX168 Financial News (Europe) - Well-known financial blog ZeroHedge reported that the historic massive oil short squeeze has just begun. Due to a historic imbalance in the market, record shorts have suddenly started seeking refuge, causing Brent crude oil prices to achieve the largest increase in nearly two years, making this market phenomenon monumental.

(Source: Twitter)

Last week, ZeroHedge warned the market that, according to the latest data from Goldman Sachs, the energy sector is about to experience a massive short squeeze.

(Source: Twitter)

"Specifically, we note that while funds were record shorting oil the most, the energy sector was the industry with the highest net sales on Goldman Sachs' US Prime book, entirely driven by shorts, at a ratio of 6.4 to 1, exceeding longs," the article mentioned.

"We say, this is an implication of the 'next super squeeze' because the recent short interest in the energy market is the largest in five years."

(Source: ZeroHedge)

The following events will go down in history, as the market experiences a historic imbalance, the record-breaking short interest suddenly begins seeking refuge, and Brent crude oil prices hit the largest increase in nearly two years.

(Source: ZeroHedge)

Reports suggest that Bloomberg even mocks those who actually did the right thing by trading before the inevitable squeeze as 'tourists', when in fact, the only tourists here are those who expect oil prices to continue absurdly plummeting despite inventories about to hit bottom.

(Source: Bloomberg)

Unfortunately for Bloomberg, the tightening of the energy market has just begun, and it is not just due to fundamental factors.

Impacted by the rapidly deteriorating situation in the Middle East, crude oil prices surged last week. Last Tuesday (October 1st), spot-month WTI and Brent crude rebounded by over 5% from their lows, as the White House initially reported that Iran was about to launch an attack. Goldman Sachs analysts pointed out that the rise in oil prices reflects a moderate risk premium, as actual production disruptions are limited, and idle capacity remains high. On Thursday last week, there were reports that the US was considering whether to support Israeli retaliatory strikes on Iran's energy infrastructure, causing energy complexes to rise again.

Then, over the weekend, the bank's commodity analysts released a new report, attempting to calculate the impact on oil prices if Israel were to 'restrict' Iranian oil production, namely:

Assuming a 2 million barrels/day disruption in Iranian oil supply lasting 6 months, it is estimated that if OPEC quickly compensates for the shortfall, Brent crude prices could briefly peak at $90, while if OPEC does not make up for the shortfall, Brent crude prices could reach around $95 by mid-2025.

Assuming a sustained 1 million barrels/day disruption in Iranian oil supply, for example due to increased sanctions enforcement, it is estimated that if OPEC gradually compensates for the shortfall, Brent crude prices could peak at around $85, and if OPEC does not make up for the shortfall, Brent crude prices could reach around $95 by 2025.

(Source: Goldman Sachs)

But this is not just about fundamental factors. In its latest weekly must-read report, Goldman Sachs' Prime Brokerage wrote, 'Following heightened geopolitical tensions and rising oil prices, hedge funds reversed course, net buying US energy stocks for the first time in seven weeks, driven almost entirely by short interest covering.'

(Source: ZeroHedge)

As a result, the long/short ratio of US energy increased by 5%, marking the largest weekly gain in nearly five months, reaching 1.36. Compared to last year, it is at the 69th percentile, and compared to the past five years, it is at the 14th percentile.

Nevertheless, the short interest surplus in the energy sector remains shocking, implying that once the upward momentum persists for a week, more brutal liquidation will occur. Not only in energy stocks but also in Goldman Sachs' Prime Brokerage, short interest is slightly below historical highs.

(Source: ZeroHedge)

This also applies to the oil sector, as traders have an unprecedentedly pessimistic view on oil after short interest in oil reached a new high two weeks ago. There is almost no short covering, and the net management fund exposure for the four main oil contracts, namely, NYMEX, ICE WTI, NYMEX, and ICE Brent Crude, is only slightly higher than their historical lows.

(Source: ZeroHedge)

Taking all these factors into consideration, Goldman Sachs energy expert Ryan Novak wrote: "The energy sector took the lead last week, and we ended the week with aggressive PB selling/short selling, but this week there has been a turnaround. Fund management positions are still short, at historically low levels, and with Israel commencing ground invasion, tensions in the Middle East are escalating. The E&P sector led the gains this week, with an increase of 7%. All eyes are on any latest news concerning attacks on Iran's energy infrastructure, which will bring further upside risk to commodities and stocks."

ZeroHedge summed up: "The bottom line is, as the momentum of the energy sector's uptrend ignites, record short positions are now painfully unwinding, with the danger of Israel leveling Haggai Island looming. The closure of record oil and energy stock short positions from a week ago has just begun. And this is still without any action taken by Israel. However, if Israel is determined to either destroy Iran's oil infrastructure or, worse, target Iran's nuclear industry, the upcoming oil explosion will make the short squeeze of 2008 Volkswagen autos look like a quirky moment in amateur hour."