AI may have the limelight, but it’s not the only trade in town worth considering. Despite the ongoing news surrounding the energy transition to cleaner sources, fossil fuels continue to push higher as seen in rising oil and gas prices.
That, in effect, is translating into more gains for the Direxion Daily Energy Bull 3X Shares (ERX). The fund is up over 30% for the year, propelled by oil and gas giants like Exxon and Chevron Texaco.
The price surge has much to do with geopolitical tensions, particularly in the Middle East.
“US oil prices are rapidly approaching $90 a barrel,” reported CNN. “Global oil prices are flirting with $92 a barrel amid worries about a wider war in the Middle East. And this has lifted gasoline prices to their highest levels in five months.”
Of course, bullish ERX traders won’t mind given the fund’s run higher. A lot of it has to do with the inherent leverage in the fund. The fund seeks daily investment results equal to 200% of the daily performance of the Energy Select Sector Index, which is provided by S&P Dow Jones Indices and includes domestic companies from the energy sector, which includes the following industries: oil, gas, consumable fuels, and energy equipment and services.
Rate Cuts Could Push ERX Higher
As far as looming interest rate cuts go, that could be an additional catalyst for higher oil and gas prices. A Motley Fool article published in Yahoo! Finance reiterated that economic growth will also lead to a rise in energy consumption and thus, translate into more demand for energy.
“Economic growth usually coincides with higher energy consumption, and therefore, higher demand,” the report confirmed. “The prospect of lower interest rates could accelerate economic growth and help the oil and gas industry, as well as the renewable energy industry.”
As far as renewable energy taking over the market share of the fossil fuel industry, that may be in the long-term horizon. In the short-term, high interest rates have been a thorn in the side for the alternative energy industry.
“Renewables were hit hard by high interest rates because the cost of capital went up and the return on investment of many projects went down,” the report said further. “By comparison, oil and gas companies that are free-cash-flow-positive don’t need to take on more debt. In fact, many are investing in low-carbon efforts.
“The energy transition is a major long-term tailwind for renewables, but the world still depends on oil and gas to support economic growth,” it added.
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