ERX: A Compelling Case For Turbocharged Energy-Related Stocks

seekingalpha01-26

Energy was the worst-performing sector in the commodities market in 2023, with a decline of 21.85%.The current economic and geopolitical landscape suggests a bullish outlook for fossil fuel prices in ...

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A composite of oil, gasoline, heating oil, natural gas, and ethanol futures and swaps declined 21.85% last year. Meanwhile, oil and gas companies moved lower in 2023, with the Energy Select Sector SPDR® Fund ETF (XLE) dropping 4.1%, outperforming the energy commodities. The price action in the most liquid traditional energy-related companies reflects higher oil and gas prices over the past year. In 2022, crude oil and natural gas futures reached the highest prices since 2008, with oil peaking at over $130 per barrel and natural gas futures probing above the $10 per MMBtu level. Higher prices bolstered energy company earnings in 2023. Meanwhile, prices could be near bottoms at under $74 per barrel on nearby NYMEX crude oil futures and below $2.60 per MMBtu on nearby natural gas futures. Markets reflect the economic and geopolitical landscape, which remains bullish for fossil fuel prices in 2024. Buying energy stocks on dips could be optimal for the coming months. The Direxion Daily Energy Bull 2X Shares ETF (NYSEARCA:ERX) is a short-term trading vehicle that turbocharges the XLE's price action on the upside. Direxion Daily Energy Bear 2X Shares ETF (ERY) is the converse product that rises when the XLE declines. ERX and ERY provide leverage, which comes at a price, as there is never any free lunch in markets. The leverage means if the market prices do not move in the anticipated direction or remain stable, time decay erodes ERX and ERY's values. Read more about the risks of leveraged ETFs here before investing any funds. In early 2024, there is a compelling case to consider traditional energy investments, given the current environment. Energy lagged in 2023 - Laggards tend to become leaders the following year Energy led the way on the downside in the six commodity sectors in 2023:  The composite of energy commodities dropped 21.85%. The composite of grains declined by 13.04%. The composite of base metals fell 10.03%. The composite of precious metals moved 8% lower. The composite of animal proteins rose 1.74%. The composite of soft commodities increased 24.04%.  The worst-performing sectors for one year often become leaders during the following year. As of January 25, WTI and Brent crude oil (CL1:COM), gasoline, and heating oil prices were higher than the closing levels of December 29, 2023. Seasonality weighs on the energy sector in winter - China does not help Gasoline is the most ubiquitous fuel, as it powers vehicles. In a mid-December 2023 Seeking Alpha article on UGA, the gasoline ETF product, I wrote, \"As we move towards 2024, and the 2024 driving season begins around May, buying UGA on significant dips could be the optimal approach to gasoline investing for the coming year.\" Gasoline prices tend to reach seasonal lows in winter, which weighs on crude oil demand and prices. Meanwhile, another bearish factor has been China's economic malaise. Any improvement in the Chinese economy could lift crude oil and oil product prices later this year. The 2024 driving season is on the horizon - Geopolitics favor higher oil prices The 2024 driving season will begin in spring, and oil refineries will begin processing petroleum into gasoline over the coming months. Meanwhile, the ongoing war in Ukraine and escalating conflict in the Middle East are not bearish factors for crude oil prices. Rising tensions between the United States and Iran could cause more than a few logistical problems for transporting Middle Eastern crude oil from the Persian Gulf through choke points in the Straits of Hormuz. We have already witnessed terrorist activity by the Houthis in the Red Sea, which only increases the costs and danger for tankers in the region. Russia and Iran are critical OPEC+ participants that could impact the cartel's production policies, as they use petroleum as an economic weapon over the coming months. The current geopolitical landscape could cause sudden upside price spikes in the oil futures arena in 2024. A hot debate topic for the 2024 U.S. election - Climate change versus \"drill-baby-drill\" In November 2024, U.S. voters will head to the polls in what is shaping up to be a repeat of the 2020 contest. Incumbent President Joe Biden suffers from historically low approval ratings, while former President Trump faces over 90 felony counts. Meanwhile, whoever winds up with their parties' nomination, Democrats favor addressing climate change through supporting renewable and alternative energy production and consumption while inhibiting fossil fuels. Republicans support energy independence through \"drill-baby-drill\" and \"frack-baby-frack\" policies. Increased U.S. hydrocarbon production under a Republican administration could weigh on prices, while the greener path for energy under Democrats over the coming years will keep pricing power with OPEC+. Until November, the cartel remains dominant in determining international supplies and prices. Meanwhile, the U.S. Strategic Petroleum Reserves, or SPR, are below 366 million barrels and remain significantly under the level of late 2021, when it was over 600 million barrels. The Biden Administration's target level for replenishing the SPR is $67-$72 per barrel, and the price of nearby NYMEX futures was around $75 per barrel on January 25. U.S. plans to buy for the SPR could put a floor below oil prices over the coming months as it would take nearly a quarter of a billion barrels to bring the SPR to the late 2021 levels. ERX is a leveraged approach to traditional energy stocks - A trading, not an investing instrument WTI and Brent crude oil prices fell between 10% and 11% in 2023. The S&P 500 Energy Sector SPDR, holding the leading U.S. oil and oil-related companies, declined 4.15% last year. XLE did better than oil prices, as the oil companies benefited from high petroleum prices since the 2022 highs when the price traded above the $130 per barrel level. If crude oil prices rise over the coming months, XLE will likely follow. At $80.33 per share on January 25, the XLE was 4.2% lower than the December 29, 2023, closing level of $83.84. The fund summary for the Direxion Daily Energy Bull 2X Shares ETF states: Fund Profile for the Leveraged ERX ETF Product (Seeking Alpha) ERX's top holdings as of January 18 were: Top Holdings of the ERX ETF Product (Seeking Alpha) In a December 5 Seeking Alpha article on ERX, I wrote: In late 2023, I favor ERX with tight prices and time stops, as U.S. SPR repurchases could support energy prices over the coming weeks and months. Moreover, Saudi Arabia requires $80 per barrel to balance its domestic budget, and Russia and Iran need the highest possible oil prices to fund their military operations. Lower oil prices would likely cause OPEC+ to come together with defensive actions to increase the energy commodity's price. Finally, as oil-producing countries move away from U.S. dollar pricing, a decline in the U.S. currency is typically bullish for all commodity prices, and crude oil is no exception. ERX is not a buy-and-hold product and requires significant attention. I like to use ERX when I anticipate rising oil-related share prices, accepting short-term losses when stopped out because of timing in exchange for oversized gains when the share prices move higher. While we are in the heart of the winter, the futures market will soon begin looking towards spring and summer when gasoline and crude oil demand will rise. The turbulent geopolitical landscape could cause prices to rise over the coming weeks and months. Higher oil prices translate to increasing profits for petroleum-related U.S. companies. ERX is not appropriate for medium or long-term investment purposes, but it can be a valuable tool for short-term trading. I continue to trade ERX from the long side, using tight prices and time stops, risking short-term losses in the quest for significant profits if crude oil prices head significantly higher. The geopolitical landscape increases the odds of upside price spikes in the current environment. At $82.20 on January 25, the XLE has dropped 2% in 2024. Chart of the Unleveraged XLE ETF product (Barchart) Time decay and a decline in XLE have sent ERX 4.5% lower from $56.57 at the end of 2023 to $54.00 on January 25. Seasonality and geopolitics support oil prices over the coming months. ERX could be a valuable short-term tool, but the time decay and leverage dramatically increase the potential downside risks. ERX requires a plan for risk-reward and a dynamic approach. Stick to time and price stops to protect capital. It is only appropriate to adjust risk-reward dynamics if the leveraged ETF moves higher in the anticipated direction. In that case, increase profit horizons while moving stops higher to protect profits and capital.  Buying energy stocks on the current seasonal dip could be optimal for the coming months. Direxion Daily Energy Bull 2X Shares ETF requires careful attention to risk dynamics, as leverage comes at a steep price.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2406225025"}