Bearish bets on U.S. crude are at a historic high, signaling potentially overblown expectations of a steep drop in energy prices. But not everyone is buying the doom narrative.
One contrarian analyst argues that this moment may actually mark the best entry point for oil and energy stocks in years.
U.S. West Texas Intermediate (WTI) crude has seen the most bearish positioning in 25 years, wrote macro analyst Otavio Costa, citing CFTC futures data.
Net positioning — long contracts minus shorts as a share of total open interest — is at its lowest since the late 1990s. Put simply, hedge funds and traders haven’t been this negative on oil in decades.
The pessimism is easy to understand. WTI is down 18% over the past year and trades at roughly half of its June 2022 peak, the same month U.S. consumer prices last topped out.
History suggests betting against the herd can pay off. Costa argues the extreme negativity is itself a bullish signal, saying oil could be primed for a reversal.
Beyond sentiment, he points to fundamentals: after three years of consolidation, crude may be on the verge of a new upcycle, especially if tariffs and looming rate cuts spark another inflation wave.
Energy stocks, he adds, remain “fundamentally undervalued,” with earnings power and balance sheets not fully priced in. If oil rallies, those equities could deliver outsized gains.
Tariffs, trade, and the oil puzzle
The U.S. produces about 13.4 million barrels of crude per day as of mid-August, making it the world’s top producer, according to the Energy Information Administration. On paper, that suggests the market is well supplied.
But the mix of crude matters. Many U.S. refiners are designed to process heavier grades of oil, which domestic production doesn’t provide in large enough quantities. Canada fills much of that gap with Mexico supplying the rest.
Since the onset of Trump’s tariffs, Canada has used crude shipments as leverage in trade disputes.
That matters because “many refineries need heavier crude oil to maximize flexibility of gasoline, diesel and jet fuel production,” says the American Fuel & Petrochemical Manufacturers trade group.
At the same time, tariffs could disrupt demand. Simon Flowers, chairman of Wood Mackenzie, estimates that trade barriers could trim global oil demand by about 1 million barrels per day starting next year.
Oil is caught in a tug-of-war between historic bearish sentiment and the potential for cyclical and inflationary forces to reignite demand. Speculators may see nothing but downside, but contrarians like Costa argue this is exactly when energy deserves a second look.
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