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How to Bet on Oil with Leveraged ETFs

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After seesawing for a few days following the OPEC output cut deal on November 30, oil prices recently surged to the highest level since July 2015, after the cartel’s bigwig Saudi Arabia indicated that it will reduce production by more-than-previously indicated. Also, OPEC and non-OPEC producers including Russia on December 10 cut their first deal since 2001 to reduce output next year which in turn led to the spurt in prices (read: OPEC Finally Cuts Output: Energy Stocks & ETFs Up 10% or More).

Both WTI and Brent crude futures rose over 5% in Asian trading following the news. On Saturday, non-OPEC producers vowed to reduce “output by 558,000 bpd, short of the initial target of 600,000 bpd but still the largest-ever contribution by non-OPEC countries.”

Investors should note that on November 30, OPEC decided to slash production. The apparent hurdles to the deal – Iran and Iraq – also came in tune with others and decided to cut output about 1.2 million barrels a day by January to about 32.5 million barrels for six months.  The OPEC and non-OPEC pact will result in “an aggregate supply cut of 1.7 million barrels a day.”

As per Bloomberg, the OPEC and non-OPEC pact accounts for countries that produce 60% of the world’s oil output but does not include major producers like the U.S., China, Canada, Norway and Brazil.

How Effective Will the Pact be for Oil Patch?

As per Bernstein, “assuming reasonable compliance levels, these cuts will be enough to push the market into deficit” and lead to $60/bbl Brent crude price in the near term, especially with the commodity already hovering around $55/bbl.

The analyst expects 0.8Mbpd deficit in the oil patch in 1H17 on the OPEC and non-OPEC decision. If tightening in supplies continues into the second half of 2017, the deficit could amount to over 1.5Mbpd. This is especially true given 96.3 million barrels of oil in global demand per day this year which is expected to increase further by another 1.2 million barrels a day in 2017.

Agreed, there is a concern that U.S. shale oil production will likely gain traction if prices creep up. This in turn can bring back oversupply into the market and weigh on oil prices. Already, the U.S. rig count soared the most in 31 months (read: How Effective is the OPEC Deal for an Oil ETF Rally?).

But Bernstein believes that if oil lingers at only $60/bbl level, U.S. production will not rise by over 0.5MMbls/d from the ongoing levels. The levels are subdued enough to outweigh the cuts in OPEC and non-OPEC output along with the incremental 1.2Mbpd demand growth.

Bottom Line

If you are a believer of a successful execution of the OPEC and non-OPEC pledges, you can definitely invest in regular and leveraged oil or energy exchange-traded products for gains, at least for the short term.

Regular ETFs in Focus

Regular WTI crude ETF United States Oil (USO - Free Report) added about 1.2% on December 9, 2016 while Brent crude ETF United States Brent Oil (BNO - Free Report) climbed about 0.9% but are likely to gain substantially in the upcoming trading sessions.

Also, PowerShares S&P SmallCap Energy ETF(PSCE - Free Report) looks to track the S&P SmallCap 600 Capped Energy Index (read: Behind the Incredible 5-Year Run of Small Cap ETFs).

PowerShares DWA Energy Momentum ETFPXI) follows energy companies that are showing relative strength.

Leveraged ETFs in Focus

The ProShares Ultra Bloomberg Crude Oil ETF (UCO - Free Report) provides a leveraged play to the crude oil segment of the commodities market. It seeks to deliver twice the return of the daily performance of the Bloomberg WTI Crude Oil Subindex, which consists of futures contracts on crude oil (read: Big Inverse/Leveraged Oil ETNs About to Be Delisted).

Direxion Daily S&P Oil&Gas Exploration & Production Bull 3X ETF(GUSH - Free Report) gives three times exposure to the S&P Oil & Gas Exploration & Production Select Industry Index.

Direxion Daily Energy Bull 3X ETF (ERX - Free Report) offers three times exposure to the Energy Select Sector Index.

ProShares Ultra Oil & Gas (DIG - Free Report) offers two times the daily performance of the Dow Jones U.S. Oil & Gas Index.

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