How To Trade The Recovering, But Still Volatile Oil And Gas Industry

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Editor’s note: Any and all references to timeframes longer than one trading day are for purposes of market context only, and not recommendations of any holding timeframe. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don’t have the resources, time or inclination to constantly monitor and manage your positions, leveraged ETFs are not for you.

After crashing to a mind-boggling low in April 2020, the oil and gas industry spent all of 2021 in recovery. 

That recovery has been a substantial one, with prices now 300% higher as of January. A trader making a bullish play on that kind of recovery could have come away a huge winner. But you can’t trade past price movements so the question is: what can investors expect from the oil and gas industry next? And how can they trade based on where they think the market is moving?

The Oil and Gas Industry Landscape

The oil and gas industry is a massive one generating about $3.3 trillion in revenue every year. Many investors in the space split it into three segments: upstream, midstream, and downstream.

Upstream includes exploration and production companies that find new drilling sites and handle extraction. Midstream companies are responsible for transporting recently drilled oil to the downstream companies, who will refine it and turn it into a finished product.

While interconnected, prices in each of these segments can move independently because policy changes and evolving market trends don’t always impact each one equally. 

The January news that a federal judge blocked the lease of 1.7 million acres of the Gulf of Mexico for oil and gas drilling, for example, was a blow mostly to upstream companies who actually do the drilling and production.

Drivers of Price Movement Are Shifting

The key market drivers an investor should watch when trading oil and gas securities or derivatives include supply, demand, and geopolitics. Shifts in production and consumption can drive prices up or down, depending on how they shift the balance between supply and demand.

Geopolitics can cause supply chokeholds or disrupt supply chains when major oil-producing countries — namely, the OPEC countries, Russia, and the United States which together account for 84% of production growth — are at odds with each other.

A more recent driver that’s starting to transform the industry is climate policy. In Deloitte’s 2022 outlook for oil and gas, the report noted that companies in the industry, especially upstream where increased restrictions on new drilling are looming, are starting to diversify into renewables or invest more aggressively into becoming net-zero producers.

Other possible trends and market drivers to keep an eye out for include:

• Increased vaccination rates and new treatments could lead demand to make a faster return back to pre-pandemic levels (driving prices up).
• Potential supply issues as some OPEC countries may not be able to increase output at pace with rising demand (driving prices up).
• Declining investment in the oil and gas sector as capital investors shift toward renewables and tech (making prices more volatile).
• Increased production in the United States and Russia could cover the potential supply and demand gap but may also outpace it (driving prices down).
• Uncertainty around COVID could stall demand recovery if consumers avoid or delay travel (driving prices down).
• Oil prices rising too quickly could cause inflation, slowing economic recovery (making prices more volatile).

How to Trade Oil and Gas Trends with Direxion’s Oil and Gas ETFs

Despite making a strong recovery in 2021, there are still a lot of questions around how the pandemic and climate policy will shape the industry. For traders, that means it’s good to have a few different plays in mind so you can respond to the market quickly. ETFs like Direxion’s GUSH and DRIP - Daily S&P Oil & Gas Exp. & Prod. Bull and Bear 2X Shares could be helpful. 

Both ETFs track the S&P 500 oil and gas exploration and production index and use derivatives like futures and swaps to add 200% leverage. That means each trade you make yields double the returns — or double the losses, which is why it’s still important to do your research and have a clear strategy in place. 

GUSH is the bullish ETF that you would trade when you think prices are likely to go up. DRIP, on the other hand, is your inverse or bearish ETF, meant to be traded when you think prices are headed for a dip. A strategy that switches nimbly between both based on the latest market trends could help investors continue to see returns, no matter which direction the industry goes.

The index is made up of about 70% upstream companies in exploration and production so your trades should put more weight on trends that would impact those upstream companies the most. 

That could mean keeping an eye on news related to the United States’ fragile relationships with Russia, China, and countries in the Middle East. Also, watching for upcoming legislation or policy changes that could affect new or existing drilling and exploration. Finally, keeping track of production news and developments, especially in Russia and the United States, both of whom are expected to increase production.

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.

Leveraged and inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by investors who understand leverage risk and who actively manage their investments.

Oil and Gas Industry Risk - Companies in the oil and gas industries develop and produce crude oil and natural gas and provide drilling and other energy resources production and distribution related services. Stock prices for these types of companies are affected by supply and demand both for their specific product or services and for energy products in general the price of oil and gas, exploration and production spending, government regulation, world events and economic conditions will affect the performance of these companies.

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The “S&P Oil & Gas Exploration & Production Select Industry Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty Asset Management, LLC (“Rafferty”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Oil & Gas Exploration & Production Select Industry Index.

Direxion Shares Risks - An investment in the ETFs involves risk, including the possible loss of principal. The ETFs are non-diversified and include risks associated with concentration that results from an ETF’s investments in a particular industry or sector which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The ETFs do not attempt to, and should not be expected to, provide returns which are a multiple of the return of their respective index for periods other than a single day. For other risks including leverage, correlation, daily compounding, market volatility and risks specific to an industry or sector, please read the prospectus.

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