Will Leveraged Energy ETFs Rally Higher On Likely Output Cut?

Apart from geopolitical tensions, output cut has been a key factor in boosting oil prices from the nadir of below $30 seen in early 2016. Today, crude oil is trading around $70 a barrel.

After repeated trials, OPEC and non-OPEC leaders first decided to cut output in 2016 on Nov 30 in Vienna. Then, OPEC and non-OPEC oil behemoth Russia decided in late-2017 to extend oil production cuts until the end of 2018 only to renew the agreement in late 2018 and prolong the deal for the first six months of 2019.

Now that the deadline of the current deal is approaching, market participants are looking for signs about the fate of the long-standing output cut agreement.

In this regard, OPEC de-facto leader Saudi Arabian Energy Minister Khalid al-Falih said that a likely rollover of the output curbs into the second half of 2019 was the main option discussed at a ministerial panel meeting but “things can change by June.”

Saudi Arabia does not see the requirement to boost production now as it fears a crash in prices in the absence of cuts. But Russia wants to increase supply after June when the current OPEC+ pact expires, per the sources (read: Is Fresh OPEC+ Output Cut Enough to Boost Oil & Energy ETFs?).

Apart from chances of a further output cut, U.S. sanctions on Iran and Venezuela will likely hurt oil exports from these countries. Plus, Saudi energy minister Falih noted that oil demand in Asia has risen. If this wasn’t enough, geopolitical tension between Saudi and Iran has hit a fever pitch.

There were attacks on two Saudi oil tankers off the coast of the United Arab Emirates and another on Saudi oil facilities, for which Iran is apparently held responsible (read: Energy ETFs Rallying on Gulf Crisis: 5 High-Yielding Winners).

Any Threat to the Potential Rally?

U.S. crude inventories jumped unexpectedly to their highest since September 2017. If there is a further escalation in the US-China trade war, global growth would be crippled, which in turn will hurt the global oil demand.

Last week, trade tensions rose between the United States and China. The Trump administration lifted tariffs on $200 billion worth of Chinese goods from 10% to 25% on May 10, and China announced a retaliatory move — a tariff hike on $60 billion of American goods to 25% starting Jun 1. Trump is also considering additional tariffs on an incremental $325 billion of Chinese imports (read: Full-Blown Trade Spat: 5 Most-Vulnerable Sector ETFs & Stocks).

If things proceed in this line, a further OPEC output cut will probably fail to boost oil prices materially.

Leveraged Energy ETFs in Focus

Still, investors who have a bullish outlook on oil prices may consider betting on the following leveraged oil and gas ETFs as long as trend is their friend.

ProShares Ultra Oil & Gas Exploration & Production (UOP)

ProShares UltraPro 3x Crude Oil ETF (OILU)

Credit Suisse (SIX:CSGN) X-Links Monthly Pay 2xLeveraged Alerian MLP Index ETN ( (NS:AMJL) )

E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index ( (JK:MLPL) )

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>