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Rising Prices Are Heating Up The Summer Energy Trade

ETF Professor

Higher oil prices, expectations for increased gasoline demand with the summer travel season in full swing and looming second-quarter earnings reports are among the catalysts that could spark the energy sector in the near-term.

Thanks to rising oil prices and improved earnings, energy is one of a small amount of S&P 500 sectors in the green year-to-date. The aforementioned catalysts and others could bring opportunity with leveraged energy exchange traded funds (ETFs), including the Direxion Daily Energy Bull 3X Shares (NYSE: ERX).

Why It's Important

ERX attempts to deliver triple the daily returns of the Energy Select Sector Index. A bearish counterpart, the Direxion Daily Energy Bear 3X Shares (NYSE: ERY), looks to deliver triple the daily inverse returns of that benchmark.

Energy sector sentiment is getting a lift from seasonality and encouraging inventories data. Recently, the Organization of Petroleum Exporting Countries (OPEC) and Russia agreed to up output to support prices around the $80 range and to make up for dwindling production in Venezuela. Even with the U.S. pumping at or near all-time highs, oil is one of this year's best-performing commodities.

Why It's Important

“Catalysts for scarcity still exist for the most part, but now are amplified by an increasingly tenuous trade outlook, further turmoil in Venezuela, and increasing crude supply from the world’s fastest growing oil exporter: The United States,” said Direxion in a recent note.

Historically, the third quarter is unkind to the energy sector, but the bullish ERX gained about 2.5 percent last week. In the coming weeks, second-quarter earnings reports will trickle in, giving traders an opportunity to deploy ERX and ERY on an event-driven basis.

Dow components Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX), the two largest U.S. oil companies, combine for more than 40 percent of the Energy Select Sector Index's weight.

What's Next

“In the near term, ExxonMobil has been getting the bulk of positive attention from the recent rally in crude prices and its buyback potential,” said Direxion. “However, components Chevron and EOG Resources Inc. (NYSE: EOG) have both shown strong bottom line growth this year, beating analyst estimates by 25 percent in their most recent earnings report. But, investors should also remain wary if the geopolitical picture gets too harried.”

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