Should energy stocks go in our basket?
Energy has been tough this year with the S&P500 Energy Sector down 17% through the end of August. But there may be a silver lining for the maligned sector. US oil inventories are now the lowest they’ve been since early 2016. Natural gas inventories are within 1% of their five-year average and much lower than this time last year. And the Baker Hughes rig count, which rose almost in a straight line from June 2016 to June 2017, has flattened out with little to no net new rigs coming online in the last three months. Another piece of good news is that the S&P500 energy sector has been positive in October, November, and December on average over the last ten years. OPEC continues to try to freeze its output as well.
Unfortunately, though, there are just too many wild cards to contend with on a global level to make a call. Here’s how ERX and GASL (3X Energy Bull and 3X NatGas Bull) have fared so far this year.
Whether you want to bet on these trends continuing with ERY (3X Bear Energy) or GASX (3X Bear NatGas) or on a reversal ERX (3X Bull Energy) or GASL (3X Bull NatGas), Direxion has you covered.
Source: Bloomberg. Past performance does not guarantee future results.
What can you expect from the energy sector this holiday season?
Energy and natural gas have been at their worst this year. The energy sector, as tracked by the Energy Select Sector SPDR Fund (XLE), has lost ~17.0% year-to-date as of August 31. Higher oil inventories and the overproduction of crude oil weighed on oil prices this year, which affected the sector’s performance.
The Organization of the Petroleum Exporting Countries (or OPEC) continues its effort to cut down production levels to boost oil prices. In November 2016, OPEC announced production cuts and it extended the cuts to nine months by 1.8 million barrels per day. In the past few months, data from the EIA (U.S. Energy Information Administration) have shown a decline in US crude oil production, which has boosted oil prices (USO) (USL). In the last three months, crude oil prices have risen 2.6% as of August 31. There is a possibility that OPEC might further limit production to harmonize the demand and supply situation for crude oil.
Rising oil prices also drive natural gas prices, which haven’t performed well this year either. Natural gas is an associated product obtained during crude oil extraction. An increase in oil prices leads to higher oil production and thus higher natural gas supply.
Empirical evidence has shown that the energy sector tends to see positive returns during the holiday season (last three months of the year). With OPEC’s ongoing efforts to boost oil prices, should energy stocks occupy a spot in your shopping basket in the coming months? You should also keep in mind that other factors like geopolitical and economic events, global economic growth, and unplanned supply disruptions also influence oil prices. Investors could consider the Direxion’s Daily Energy 3X Bull (ERX), the Energy 3X Bear (ERY), the Natural Gas 3X Bull (GASL), and the Natural Gas 3X Bear (GASX).