Oil’s recent rebound is lifting the once downtrodden energy sector, which is still one of the worst-performing groups in the S&P 500 this year.
Aggressive traders can prepare for a possible pullback with the Direxion Daily S&P Oil & Gas Exploration & Production Bear 3x Shares (NYSEArca:DRIP), which takes the -3x or -300% daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has a bullish counterpart, the Direxion Daily S&P Oil & Gas Exploration & Production Bull 3x Shares (NYSEArca:GUSH).
Active traders have utilized leveraged and inverse ETFs in a number of portfolio strategies. A small percentage allocations in inverse leveraged options can help hedge or mitigate detraction from existing positions, so investors are simultaneously going long and short to hedge risk. Through leveraged and inverse ETFs, investors may limit portfolio volatility or diminish drawdowns in the event of a steep market correction.
While the Organization of Petroleum Exporting Countries have moved to cut production, expectations of continued U.S. shale production remain a deterring factor. Nevertheless, recent U.S. inventory drawdowns, which if sustained, could support the current price levels. With 2018 imminent, there are several factors for oil investors to consider.
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“Oil has struggled to reach $60 per barrel since January when OPEC agreed to cut production supply by about 1.8 million barrels per day in an attempt to stave off a huge drop in oil prices,” according to Direxion. “The oil industry has pegged $60 per barrel as a healthy number for the commodity. However, even with (mostly solid) compliance among participating nations, the OPEC basket price of oil remained around the $50 level, having never approached the $60 target.”
Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. While demand has yet to catch up to elevated supplies, rebounding economies in Europe and steady economic growth in the U.S. could prompt more upside for oil next year.
“The IEA’s cut, which dropped the demand estimate by 100,000 barrels a day for the next two years, contrasts OPEC’s own outlook on oil demand, which actually forecasts a 130,000 barrel per day increase,” said Direxion. “These next few months will be critical for oil watchers. Crude is facing heavy technical resistance in the $58 handle. If it’s going to attempt to get back to 2014 prices, the market’s going to need to see it hit $60 and hold it for a considerable amount of time.”
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