The recent bankruptcy of Silicon Valley Bank and Credit Suisse crisis have sent shockwaves through both the financial and oil markets, raising concerns about a potential recession and resulting in lower demand and prices. As crude and natural gas prices hit a trough, trading opportunities arise for investors with room to recoup losses. This article examines such an opportunity by exploring two ETFs, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull and the ProShares Ultra Bloomberg Natural Gas, and their recent price actions, risks, and trading potentials. The article also discusses the volatility and risks associated with leveraging, as well as other key stakeholders in the energy markets, such as OPEC+ and the U.S. Federal Reserve.
Important Details about Trading Oil And Natural Gas: Buy GUSH ETF But Avoid BOIL –
– The bankruptcy of Silicon Valley Bank and Credit Suisse crisis caused concerns over a potential economic impact and led to a drop in crude and natural gas prices.
– Trading opportunities exist as prices have room to recoup losses, and two ETFs (GUSH and BOIL) can be used for this purpose.
– GUSH tracks US-based companies in the O&G exploration and production sub-industry and is more indirectly exposed to crude oil, making it less volatile than BOIL.
– BOIL provides investment results on a daily basis, corresponding to 2x the daily performance of the Bloomberg Natural Gas Subindex.
– BOIL’s trajectory is determined by demand/supply, and although it is currently benefiting from the global demand for North American natural gas, it may suffer from a lack of momentum and increased supply.
– There are risks associated with using leverage and calculating gains when using GUSH and BOIL ETFs.
– OPEC+ and the Federal Reserve’s actions, as well as geopolitical tension and uncertainties, can impact energy prices.
Exploring Trading Opportunities in the Wake of the SVB and Credit Suisse Crisis
The bankruptcy of Silicon Valley Bank (SIVB) and Credit Suisse (CS) crisis has sent shockwaves through both the financial and oil markets. The potential for recession, synonymous with lower demand and prices, is a concern for investors. Crude and natural gas prices have reached a trough, trading at their lowest levels since December 2021, albeit with natural gas prices slightly above their February lows. However, such low prices can present trading opportunities for investors in the energy market.
In this article, we will explore such an opportunity by using two ETFs, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull and the ProShares Ultra Bloomberg Natural Gas. These ETFs have both suffered in the last month, as shown in the charts below. This article will also elaborate on the related risks, particularly considering the use of leverage by these ETFs.
Price Action Summary
At the time of writing, the barrel of Brent, or North Sea crude oil, for May delivery fell to $72.26, its lowest level of the year before recovering to $74.47. WTI, also known as Texas Light Sweet, for April delivery, fell to $66.21, a level not seen in 15 months, and natural gas fell to its lowest level of $2.177 per million BTU or British thermal units, a level not seen since August 2020.
Catalysts for Low Crude Oil Prices
One of the reasons crude oil prices have plummeted is the liquidity front after the failure of SVB. This liquidity problem implies deteriorating economic conditions, resulting in Goldman Sachs increasing the probability of a U.S. recession to 35% based on banking stress.
This largely explains why crude oil prices plunged, which was also exacerbated by what started as a regional banking crisis in the United States suddenly turning into a European crisis, namely with Credit Suisse (CS) whose largest shareholder ruling out any increase in bank capital, causing panic in the market. However, things have now calmed given that the Swiss National Bank has provided a $53.7 billion backstop. Therefore, with contagion risk having been averted, there should normally be a pickup in the price of crude oil, which should bolster the value of GUSH.
Trading GUSH
GUSH tracks the S&P Oil & Gas Exploration & Production Select Industry Index, which includes U.S.-based companies from the oil and gas exploration and production sub-industry, at 73.11% of its overall weight. Oil and Gas Refining and Marketing constitute 20.45% of overall weightings, with integrated O&G making up the remaining 6.45%. With its predominant exposure to production activities, GUSH’s holdings are particularly susceptible to fluctuations in the price of crude oil.
Thus, according to our calculation, an approximate 10% change in the price of WTI can trigger a 24% variation in GUSH’s share price, which makes it particularly attractive for trading purposes. Therefore, with WTI having retrenched by over $7 in the past week, investors can expect a $16.8 gain in GUSH, which would put its share price at $126.47.
Comparing GUSH to UCO
GUSH tracks a modified equal-weighted index designed to measure the performance of sub-industries. In contrast, ProShares Ultra Bloomberg Crude Oil ETF (UCO), another 2x bullish ETF, tracks WTI Crude Oil futures contracts.
Over a one-year period, GUSH has been less volatile than UCO. The main reason for this is that the Direxion ETF provides indirect exposure to crude oil, namely through stocks, whereas ProShares ETF offers more direct exposure.
Trading BOIL
On the other hand, the ProShares Ultra Bloomberg Natural Gas ETF (BOIL) has been impacted by the global demand for North American natural gas. BOIL provides investment results on a daily basis, corresponding to 2x the daily performance of the Bloomberg Natural Gas Subindex. This is a highly leveraged trading instrument that seeks a return equivalent to two times its underlying benchmark.
However, while the ETF’s moves are certainly dictated by the price of natural gas, the fund managers, or ProShares, stress that BOIL is not intended to track the performance of the commodity spot price. This means BOIL is not an optimal ETF for investors seeking direct exposure to natural gas prices.
While higher prices could see the less profitable rigs coming back to activity, which means more supply, which could pressure prices. Also, natural gas does not benefit from the same SVB-type momentum as crude oil.
Looking at momentum factors, at an RSI of 38.42 and a share price of $5.05, BOIL could rise further and reach $7.86, a level last reached on March 3, signifying a 56% upside. However, given the current market volatility, BOIL may not be suitable to investors who want safe trading opportunities.
Volatility and Risks when using Leverage
Several variables are currently impacting the energy markets, including economic slowdown, the war in Eastern Europe, and escalating geopolitical tension between the U.S. and China. This volatility should prevail in the energy markets. Investors should take into account that the degree to which the Federal Reserve will increment interest rates at its next monetary policy meeting on March 22 may prove to be a determining factor as to the way energy prices evolve in the short term.
OPEC+ is another key stakeholder in the demand-supply equation. The oil cartel has not issued any directive to its members to reduce production despite Brent falling below $80. This could indicate that the organization sees strong demand from Asian countries, notably China and India being sustained despite uncertainties in the western world. Thus, a further failure of OPEC+ to act could herald more pain for bullish positions on energy.
Investors leveraging their trades by using ETFs like BOIL and GUSH for magnified gains must also consider the risks associated with these investments. Compared to passive and active funds, the return dynamics of these funds are different. Hence, investors assume more significant risks.
Conclusion
The bankruptcy of SVB and the Credit Suisse crisis has sent shockwaves through both the financial and oil markets. With lower demand and prices due to an impending recession, investors should consider trading opportunities in the energy market. While GUSH may be an attractive ETF for traders looking for direct and indirect exposure to crude oil, BOIL may not be optimal for those who want direct exposure to natural gas prices. Both ETFs come with risks associated with leverage, and investors must take note of the risks before trading. With the current market volatility, investors must take precautionary steps concerned with investment exposure to minimize potential losses, making informed investment decisions in this highly volatile market.