A relative period of calm in the oil market may well be over, following last week’s goings on in the Middle East. Most notably, the U.S. renewed military strikes against Iran, with President Trump potentially unnerving the oil market by saying the already fragile peace deal between the two countries is over.
If volatility increases on the back of further military engagement in Iran, traders may want to examine the Direxion Daily Energy Bull 2X ETF (ERX ) and the Direxion Daily Energy Bear 2X ETF (ERY ). ERX attempts to deliver 300% of the daily returns of the Energy Select Sector Index. Meanwhile, ERX seeks intraday returns corresponding with 200% of the inverse performance of that index.
Both Direxion ETFs are geared plays on oil equities, not crude prices. However, major oil stocks could soon reenter the spotlight, as Iran rushes to export as much crude as possible in a short timeframe to generate revenue for its war-riddled economy.
“Iran is squeezing out as many oil tankers as possible, loading 11 million barrels of crude on July 9, as US President Trump threatened to reimpose a blockade on Iranian outflows via the Gulf of Oman after the short-lived ceasefire deal started to disintegrate,” reported Tom Kool for OilPrice.com.
Supply May Be Constrained Again
Over the near-term, traders could renew their enthusiasm for the bullish ERX if global oil supplies are constrained. Lower supplies often lead to higher prices, providing a short-term lift to energy stocks.
“Renewed attacks on ships transiting the Strait of Hormuz have prompted shippers to halt their movement out of the Gulf, with QatarEnergy’s Al Ghariya, Duhail and al Ruwais LNG carriers turning back from the critical waterway, sending insurance costs higher again,” according to OilPrice.
However, if crude prices jump too much too rapidly, the inverse ERY could be useful. After all, high oil prices are often demand-destructive, and that’s negative for oil equities.
Outside of the Middle East, there other geopolitical goings on that could move ERX and ERY. For example, Russia is hitting the pause button on liquefied natural gas (LNG) exports for a month. In more positive news from a supply perspective, Venezuela continues moving toward a more forward-thinking national oil policy.
Bottom line: In trading, there are no guarantees. The oil market embodies that sentiment, but crude won’t be leaving the headlines over the near-term. Either of the Direxion ETFs could be useful to risk-tolerant traders.
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