Recession fears are making their way into the oil and gas markets, which could mean that tamped-down demand for these commodities could set up profitable opportunities for inverse exchange traded funds (ETFs).
Reuters reported that recession fears could “dent fuel demand” after a rise in U.S. gasoline inventories. While that could mean less pain at the pump for consumers, traders bullish on oil and gas could be feeling the downward price pressure.
“At the end of the day, one of the big reasons why we’re sliding is fear of recession,” said Bob Yawger, executive director of energy futures at Mizuho, in the Reuters report.
The Federal Reserve has been caught in a balancing act of raising interest rates while guiding the economy to a soft landing amid inflation. Recession fears have been brewing in the capital markets for some time, but they may be making their way into lesser demand for commodities like oil and gas.
As the economy was heading back to normalcy following the pandemic, the demand for oil and gas surged as seen in the MSCI ACWI Oil, Gas & Consumable Fuels index. It shot up to over 100% within the last few years and never looked back.
^MSACWIOGCF data by YCharts
At some point, the index was going to fall back down and it has so far this year. It’s down just under 1% but could be the early beginnings of more bearish things to come.
^MSACWIOGCF data by YCharts
Double Down on Bearish Oil, Gas Bets
If more weakness in the oil and gas market is ahead, traders can consider the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (DRIP) to double down on bearish bets. The fund itself seeks daily investment results of 200%, or 200% of the inverse (or opposite), of the performance of the S&P Oil & Gas Exploration & Production Select Industry Index.
Playing off the recent weakness in oil and gas prices, the fund is up about 13% within the last few months. As recession fears amplify, it could feed into more strength for DRIP.
“At the core of the current bout of price malaise are concerns that rising interest rates could hit economic growth,” said Stephen Brennock of oil broker PVM, in another Reuters report.
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