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ETFs for Quick Profits from the Oil Rebound

Sweta Killa

Oil has been showing immense strength in recent weeks with prices bouncing from their recent lows. In fact, the price of oil jumped over 9% last week with U.S. crude currently hovering above $36 per barrel and Brent oil trading above $39 per barrel at the time of writing. With this, U.S. crude prices are up nearly 33% and Brent oil is up 27% from their 12-year lows hit in mid February.


Inside The Surge


The impressive gains came on the back of improving demand/supply dynamics, which are rebuilding investors lost confidence in the rebalancing of the oil market. First, talks over a deal by major oil producers to freeze oil output at the January level infused an air of optimism (read: Oil ETFs in Focus on Oil Output Freeze Talks).

 

Second, output from the Organization of the Petroleum Exporting Countries (OPEC) dropped by 79,000 barrels per day last month while U.S. production slipped by 25,000 barrels per day for the week ending February 26. The positive weekly data from oil services firm Baker Hughes (BHI), which showed that the number of rigs fell to the lowest level since December 2009 also supported the rally in oil price as it reflects that U.S. output will continue to decline in the coming weeks. 

 

Finally, the International Energy Agency (IEA) projects a sharp decline in oil production to 4.1 million barrels a day over the 2015 through 2021 period from 11 million barrels a day during 2009–2015. This is because a slew of capital spending cuts last year and another round of major cuts this year will continue to curb oil production and reduce global supply, and thereby lead to higher oil prices.


On the demand front, the global outlook is looking bright. Abating fears of a recession in the U.S. following the recent encouraging data, and renewed optimism of growth in China, Europe and Japan could drive oil demand in the coming months.


Given the fresh round of optimism and signs that the oil market may begin to tighten, many investors have turned bullish on the energy sector and are seeking to tap this opportunity.


How to Play?


For them, a leveraged play on energy could be an excellent idea as these could lead to huge gains in a very short time frame when compared to the simple products. Below, we have highlighted five leveraged energy ETFs that could be excellent picks for investors seeking to make large profits from the energy space in a short span (see: all Leveraged Equity ETFs here):

 

Direxion Daily Energy Bull & 3x Shares (ERX)

 

This fund creates a triple (3x or 300%) leveraged long position in the Energy Select Sector Index while charging 95 bps in fees a year. It is a popular and liquid option in the energy leveraged space with AUM of $545.2 million and average trading volume of 4.2 million shares. The ETF gained 20.1% over the past one week.

 

ProShares Ultra Oil & Gas ETF (DIG)

 

This ETF seeks to deliver twice (2x or 200%) the daily performance of the Dow Jones U.S. Oil & Gas Index. It has been able to manage $151.4 million in its asset base with trades in a good volume of more than 302,000 shares per day on average. The product was up 12.9% in the same time frame (read: How to Play Oil ETFs Now?).

 

Direxion Daily S&P Oil & Gas Exploration & Production Bull 3x Shares (GUSH)

 

This fund offers triple exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $47.7 million in its asset base since its inception in late May 2015. Average daily volume is solid at around 913,000 shares while expense ratio is 0.95%. The product gained 57.7% over the past five trading sessions.

 

ProShares Ultra Oil & Gas Exploration & Production ETF (UOP)

 

This product also tracks the S&P Oil & Gas Exploration & Production Select Industry Index, but offers twice the returns of the daily performance with the same expense ratio as that of GUSH. It has AUM of just $0.8 million and trades in a paltry volume of 2,000 shares. UOP was up over 28% in the same time frame.

 

Direxion Daily Natural Gas Related Bull 3x Shares (GASL)


This product seeks to deliver thrice the daily performance of the ISE Revere Natural Gas Index, which derives a substantial portion of its revenues from the exploration and production of natural gas. The fund has amassed $55.1 million in AUM and trades in heavy average daily volume of 2.2 million shares. Expense ratio comes in at 0.95%. The fund delivered whopping returns of 88.6% in the past five trading sessions.


Bottom Line


As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing – when combined with leverage – may make these products deviate significantly from the expected long-term performance figures (read: 16 Highly Traded Leveraged/Inverse ETFs of 2016).


Still, for ETF investors who are bullish on the energy sector for the near term, either of the above products can be an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.


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DIR-EGY BULL 3X (ERX): ETF Research Reports
 
PRO-ULT OIL&GAS (DIG): ETF Research Reports
 
DIRX-D SP OG BL (GUSH): ETF Research Reports
 
PRO-SH O&G E&P (UOP): ETF Research Reports
 
DIR-D NG BL 3X (GASL): ETF Research Reports
 
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