Short sellers hitting energy at near-crisis levels

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange.

Short sellers are piling into energy stocks at a rate nearly equal to what banks were seeing during the financial crisis.

As oil prices struggle to recover and expected debt default rates climb, the level of energy shorts on the S&P 1500 as a percentage of float, or those available for selling, is at 12.5 percent, approaching the 13.45 percent level financials saw in July 2008 amid the crisis, according to calculations by Bespoke Investment Group.

Short interest for energy is at the third-highest level of any sector dating back to 2007 just before the crisis unfolded. Consumer discretionary shares hit 18 percent, also in July 2008.

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Short sellers borrow shares then sell them for later repurchase in hopes the stock will fall. They then profit on the price difference.

Bespoke founder Paul Hickey pointed out that the way short sellers battered financial shares during the crisis prompted action from the Securities and Exchange Commission.

"One important note about the financial sector is that back in 2008, when Lehman (Brothers) failed (on Sept. 15), the SEC issued a ban on short selling for stocks in the financial sector," Hickey said. "That, and the fact that many heavily shorted stocks were delisted precipitated a sharp decline in the average (short interest as a percentage of float) level for the financial sector."

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Among the hardest-hit individual companies are Transocean (36.3 percent short interest of shares outstanding), Chesapeake Energy (35.3 percent) and Consol Energy (28.8 percent), which saw a 20 percent gain in short interest during the most recent two-week filing period, according to FactSet. The companies represent the second, third and fourth most-shorted on the S&P 500. Non-energy company GameStop is first with 37.7 percent.

Energy as a sector is down 4 percent year to date and nearly 26 percent over the past 12 months. Drillers have been hit especially hard, falling nearly 20 percent in 2016 and about 40 percent over the past year. The top-performing company year to date in the sector has been Spectra Energy, which has gained more than 22 percent. There are only eight stocks in the sector that are positive this year.