Oil giants Chevron Corp (CVX) and Exxon Mobil Corp (XOM) experienced a slight uptick in pre-market trading on Monday, attempting to recover from the previous week’s losses. Both companies, particularly Chevron, suffered significant declines following concerns about the global economy. These anxieties intensified on Friday after the release of the August jobs report. While payrolls expanded by 142,000 last month, surpassing July’s 89,000 but falling short of economists’ forecast of 161,000, the unemployment rate dropped to 4.2%, meeting expectations. However, the so-called “real” unemployment rate, which includes discouraged workers and those in part-time roles, jumped to 7.9%.
This indication of a slowing economy negatively impacted oil prices, leading to a substantial decline in benchmark indices West Texas Intermediate and Brent Crude. Adding to the market jitters, deflated consumer confidence indicators in China have caused concern among major Western brands. This has further heightened the threat of reduced global hydrocarbon demand, further impacting oil prices. Compounding these issues, geopolitical dynamics, particularly those revolving around the Middle East, could further destabilize the energy market in unpredictable ways.
While the current situation appears bleak, there are also potential positive catalysts for the oil market. Historically, OPEC+ member countries have cut production to support falling prices. Additionally, recent Ukrainian drone attacks on Russian oil installations have significantly damaged the aggressor nation’s downstream infrastructure. Continued disruptions could ironically boost oil prices due to the artificial supply destruction. Looking further ahead, the International Energy Agency forecasts that India will become the largest source of global oil demand growth between now and 2030. This increasing demand could help offset the slowdown from the Chinese market.
Investors seeking to navigate this volatile market may consider leveraged exchange-traded funds offered by Direxion. For bullish investors, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares (GUSH) provides 200% exposure to the performance of the underlying S&P Oil & Gas Exploration & Production Select Industry Index. The top three holdings of this index are Diamondback Energy Inc (FANG), Permian Resources Corp (PR), and Matador Resources Co (MTDR). Those bearish on hydrocarbons can consider the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (DRIP). This ETF aims to replicate 200% of the inverse performance of the aforementioned index.
It is crucial for investors to understand that leveraged ETFs like GUSH and DRIP should only be held for short periods, ideally no more than one day. The daily compounding effect associated with these leveraged vehicles can create a significant divergence between expected and actual fund performance, potentially leading to unfavorable outcomes.
Despite a strong start to the year, the GUSH ETF has dropped over 18% year-to-date. The recent downturn in the hydrocarbon energy market has pushed GUSH below its 50-day moving average ($32.84) and 200-day moving average ($34.47). However, the $27 price range appears to be a long-term support line. If GUSH can maintain its position, a recovery could be possible, especially given the presence of potential positive catalysts.
In contrast to GUSH, the DRIP ETF experienced a difficult start in 2024 but has benefited from declining oil prices since April. Last week, DRIP saw robust performance, gaining over 15% in market value. Whether the bearish fund can continue its upward trajectory remains uncertain. DRIP is currently facing a resistance zone ranging from approximately $12 to $13.
Investors must carefully consider the risks and potential rewards associated with these leveraged ETFs and make informed decisions based on their individual investment objectives and risk tolerance.
