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Leveraged Oil & Energy ETFs to Play as Saudi Hikes Price

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Oil prices have been surging amid the Russia-Ukraine geopolitical crisis. Since Russia is oil-rich, chances of supply disruptions led to this price rally. Meanwhile, Saudi-led OPEC has not budged much regarding production boost-up.

Against this backdrop, Brent breached $120-a-barrel level after Saudi Arabia hiked prices for its crude sales in July, indicating a supply crunch even after OPEC+ agreed to increase output in July and August by 648,000 barrels per day, or 50% more than previously planned. Iraq plans to raise output to 4.58 million bpd in July.

Saudi could enact the price hike because the increase in output still lags the demand growth expectations. This is especially true given the EU's partial ban on Russian oil imports, per Commonwealth Bank analyst Vivek Dhar, as quoted on Reuters.

As summer driving is gaining momentum and jet fuel continues to recover, world oil demand is set to rise by 3.6 mb/d from April to August, per IEA. For 2022, global oil demand is expected to rise by 1.8 mb/d on average to 99.4 mb/d, per IEA.

Investors should note that Saudi Arabia boosted the official selling price (OSP) for its flagship Arab light crude to Asia to a $6.50 premium versus the average of the Oman and Dubai benchmarks, from a $4.40 premium in June, state oil producer Aramco said on Sunday, as quoted on Reuters. The July OSP is the highest since May, when prices hit all-time highs.

Against this backdrop, below we highlight a few leveraged oil & energy ETFs for short-term play. Leveraged ETFs provide multiple exposure (2X or 3X) to the daily performance of the underlying index. These funds employ various investment strategies such as the use of swaps, futures contracts and other derivative instruments to accomplish their objectives. Due to their compounding effect, investors can enjoy higher returns in a very short period of time, provided the trend remains a friend.

ETFs in Focus

ProShares Ultra Bloomberg Crude Oil (UCO - Free Report) – Up 6.1% Past Week

Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares (GUSH - Free Report) – Up 11.6%

MicroSectors Oil & Gas Exp. & Prod. 3x Leveraged ETN (OILU - Free Report) – Up 4.2%

ProShares Ultra Oil & Gas (DIG - Free Report) – Up 3.5%

Direxion Daily Energy Bull 2X Shares (ERX - Free Report) – Up 3.2%

Any Reason for Worry?

Investors should also note that leveraged ETFs involve a great deal of risk when compared to the traditional funds. They are often more costly and can be less tax-efficient, as they can see capital gains through the use of swaps and other derivative instruments.

Plus, world oil demand growth is forecast to slow to 1.9 mb/d in 2Q22 from 4.4 mb/d in 1Q22 and is now forecast to ease to 490 kb/d on average in the second half of the year on a more tepid economic outlook and higher oil prices.