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Energy Stocks: Hot! Hot! Hot!

March 08, 2021

Editor’s note: Any and all references to timeframes longer than one trading day are for purposes of market context only, and not recommendations of any holding timeframe. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don’t have the resources, time or inclination to constantly monitor and manage your positions, leveraged ETFs are not for you.

It took almost one entire calendar year, essentially all of 2020, but it seems as though things have finally returned to normal.

No, we’re not talking about the pandemic, which will likely remain with the world in some capacity for months or even years to come. We’re talking about oil prices, which collapsed at the start of 2020, even before the pandemic became a global concern. Through the remainder of that year, the price of Brent and WTI crude oil cratered with the latter falling below zero at one point.

Because of the price drop combined with a global glut of oil and a lack of demand for it, 2020 was a brutal year for the energy sector. It is only in recent months that the price of oil has rebounded to a sustainable level, which most analysts agree is above $60 a barrel to remain sustainable.

With energy again hitting that all-important benchmark, we thought we’d take a look at the performance of two of Direxion’s core energy and oil ETFs to see what catalysts might impact the trajectory of the drillers and wholesalers as 2021 unfolds.

OPEC Effect

Designed to track 200% of the daily performance of the S&P Dow Jones Energy Select Sector Index (IXETR), Direxion Daily Energy Bull 2X Shares (ERX) has climbed roughly 90% through the first two months of 2020.

Bloomberg. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For standardized and month-end click here.

With constituents in the upstream and downstream petroleum markets, ERX has benefitted significantly from the steady rise in oil prices since higher prices increase the profit margin on sales. This has been particularly true through the past 4 months, which has seen crude prices climb from $40 a barrel to their current $60 range as inventories have fallen by more than 300 million barrels.

The increase can be chalked up to myriad factors, including rising demand in the midst of a more controlled pandemic outlook. However, the primary mover in driving down oil inventories and driving up prices is OPEC, as well as Russia and other OPEC-adjacent oil-exporting countries. Beginning late last year, OPEC+ made a concerted effort to cap oil production, and those cuts are now expected to extend into April as the organization anticipates an improved, but still diminished, outlook for energy demand in 2021.

This price bump has translated into improved revenue across the board, with Chevron (CVX),  Exxon Mobil (XOM), Phillips 66 (PSX) Schlumberger (SLB) and more all showing quarter-over-quarter revenue growth. While all of those firms are still posting numbers below their 2019 sales, the improved figures are an encouraging sign for coming quarters as global commerce and production make back ground lost during the pandemic.

Less Inventory and More Regulation

While the world’s energy suppliers have been able to claw back some of their revenue in recent months thanks to rising prices, the drillers and refiners are actually the firms seeing the steepest growth in the energy resurgence. 

The Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares (GUSH), which tracks 200% the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index (SPSIOPTR), is higher by 125% year-to-date. This is thanks again to diminishing global oil inventories boosting prices, but the higher dollar benchmark carries a bit more weight for the upstream energy companies given the hardline production cuts OPEC nations have put in place as well as the increasing roadblocks that many countries are putting up for new drilling, including the U.S. and Denmark.

Bloomberg. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For standardized and month-end click here.

Still, the tighter supply benefits existing drill sites, based on recent earnings results from the likes of Pioneer Natural Resources Company (PXD), Devon Energy Corporation (DVN) and EOG Resources (EOG), have also been able to slowly approach their results from previous years after a significant fall off.

Since OPEC+ is seemingly in the driver seat in determining price, with the newly inaugurated Biden administration scaling back drilling permits and thereby drawing down its inventories, it’s likely the world will see more stable energy prices in the near future. That’s as long as demand remains within current projections, which are modest even by OPEC standards.

Barring another unexpected, pandemic-scale calamity, or breakthrough green energy technology, energy markets seem back on steady footing in the near-term. While there is no predicting how crude prices will fare through the coming spring and summer as the world continues to battle back against COVID-19, current trends seem to point to a more mobile and energy-demanding future than we have seen in the past year.

Just over two trading months into 2021, there’s only one thing that’s certain. Whether you’re a bull or a bear, Direxion is with you. Our leveraged ETFs are powerful tools built to help you:

  • Magnify your short-term perspective with daily 2X and 3X leverage
  • Go where there’s opportunity, with bull and bear funds for both sides of the trade; and
  • Stay agile – with liquidity to trade through rapidly changing markets

Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged, or daily inverse leveraged, investment results and intend to actively monitor and manage their investment.

ERX Top 10 Index Holdings (as of 12/31/2021)

Exxon23.17
Chevron Texaco22.49
Phillips 664.46
Schlumberger4.43
ConocoPhillips4.43
Eog Resources4.24
Marathon Petroleum3.93
Kinder Morgan3.88
Williams3.55
Valero Energy3.37

GUSH Top 10 Index Holdings (as of 12/31/2021)

Phillips 664.04
Parsley Energy - Class A3.97
Pioneer National Resource3.95
Devon Energy3.93
Diamondback Energy3.88
Marathon Petroleum3.87
Valero Energy3.85
Cabot Oil3.84
Marathon Oil3.79
Exxon3.78

Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes. For additional information, see the fund’s prospectus.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

CUSIP Identifiers have been provided by CUSIP Global Services, managed on behalf of the American Bankers Association by Standard and Poor’s Financial Services, LLC, and are not for use or dissemination in any manner that would serve as a substitute for a CUSIP service. The CUSIP Database, ©2011 American Bankers Association. “CUSIP” is a registered trademark of the American Bankers Association.

Shares of the Direxion Shares are bought and sold at market price (not NAV) and are not individually redeemed from a Fund. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 pm EST (when NAV is normally calculated) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some performance results reflect expense reimbursements or recoupments and fee waivers in effect during certain periods shown. Absent these reimbursements or recoupments and fee waivers, results would have been less favorable.

Direxion Shares Risks - An investment in the ETFs involves risk, including the possible loss of principal. The ETFs are non-diversified and include risks associated with concentration that results from an ETF’s investments in a particular industry or sector which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The ETFs do not attempt to, and should not be expected to, provide returns which are a multiple of the return of their respective index for periods other than a single day. For other risks including leverage, correlation, daily compounding, market volatility and risks specific to an industry or sector, please read the prospectus.

Distributor for Direxion Shares: Foreside Fund Services, LLC.

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