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Output Cut to Be Extended? Leveraged Energy ETFs to Play

Sanghamitra Saha

Oil prices slipped to the pre-OPEC output cut level in early May on worries over brimming U.S. supplies. But probably to bring back confidence in the oil market, Saudi Arabia and Russia – the two pillars of OPEC and non-OPEC oil producers – hinted at an extension of output cuts in 2018.

The world’s largest crude producers recently indicated that they might mull over extending their output curbs for more than the six months, going by an article published on Bloomberg. This was much more than what the investing world expected from the duo before the OPEC meeting slated on May 25 (read: Oil at Pre-OPEC Level: ETFs to Benefit).

As per the source, some OPEC delegates even saw chances of deeper supply cuts. Russia’s energy minister noted, "we are discussing a number of scenarios and believe extension for a longer period will help speed up market rebalancing.”

Investors should note that on November 30, 2016, the OPEC cut a deal, per which, the bloc would have cut production by about 1.2 million barrels a day from January (read: How Effective is the OPEC Deal for an Oil ETF Rally?).

Plus, on December 10, OPEC cut the first deal with non-OPEC members since 2001 to reduce output this year. These pacts were formed for six months. U.S. crude output has grown by over 10% since mid-2016 but didn’t let oil prices to surge.

U.S. crude oil ETF United States Oil USO and Brent crude ETF United States Brent Oil BNO are down 17.5% and 15.5% so far this year (as of May 8, 2017).

This somewhat ruled out doubts over OPEC countries’ ability to stretch their deal signed in late 2016. As per the article published on Bloomberg, U.S. crude built has also been retreating for the past four weeks from record levels seen at the end of March.

How to Profit?

If you are a believer of a successful and prolonged extension of the OPEC and non-OPEC output cut pledges, you can definitely invest in regular and leveraged oil or energy exchange-traded products for gains, at least for the short term.

Definitely regular ETFs like USO, BNO, PowerShares S&P SmallCap Energy ETF PSCE and PowerShares DWA Energy Momentum ETF PXI should be able to benefit from this trend. But leveraged ETFs will get investors big gains if output cuts materialize and see effective execution (read: Can Oil ETFs Rebound on Possibility of More OPEC Cuts?).

Leveraged ETFs in Focus

ProShares Ultra Bloomberg Crude Oil ETF UCO provides a leveraged play to the crude oil segment of the commodities market. It seeks to deliver twice the return of the daily performance of the Bloomberg WTI Crude Oil Subindex, which consists of futures contracts on crude oil.

Direxion Daily S&P Oil&Gas Exploration & Production Bull 3X ETF GUSH gives three times exposure to the S&P Oil & Gas Exploration & Production Select Industry Index.

Direxion Daily Energy Bull 3X ETF ERX offers three times exposure to the Energy Select Sector Index.

ProShares Ultra Oil & Gas DIG offers two times the daily performance of the Dow Jones U.S. Oil & Gas Index.

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US-OIL FUND LP (USO): ETF Research Reports
US BRENT OIL FD (BNO): ETF Research Reports
DIR-EGY BULL 3X (ERX): ETF Research Reports
PWRSH-DW EGY MO (PXI): ETF Research Reports
PWRSH-SP SC EGY (PSCE): ETF Research Reports
PRO-ULT BB CRUD (UCO): ETF Research Reports
DIRX-D SP OG BL (GUSH): ETF Research Reports
PRO-ULT OIL&GAS (DIG): ETF Research Reports
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