Energy ETFs Rally Amid Possible OPEC Production Cuts

OPEC considers production cuts to offset coronavirus impact

Energy stocks slumped sharply in January as the spread of the coronavirus compounded this year's already uncertain economic outlook. Ironically, news surrounding the virus, which has so far claimed 560 lives in China, helped reverse losses in depressed energy markets Wednesday. Reports surfaced that the Organization of the Petroleum Exporting Countries (OPEC) and its allies are considering deeper production cuts after reviewing new data that showed the growing impact of the coronavirus on global oil demand. Meanwhile, news of a possible new vaccine to fight the illness added broad support.

The segment received a further boost from Energy Information Administration (EIA) data revealing a surprise drop in both U.S. gasoline and distillate stockpiles. It was the first decline in gasoline inventories in 13 weeks, while distillates contracted for a third consecutive week, indicating improving demand.

Those who trade oil and gas stocks should consider gaining exposure to the sector through exchange-traded funds (ETFs). Below, we discuss three energy funds that have found solid buying interest near key technical support in recent trading sessions.

Direxion Daily Energy Bull 3X Shares (ERX)

Created in 2008, the Direxion Daily Energy Bull 3X Shares (ERX) aims to provide three times the daily return of the Energy Select Sector Index. Large-cap industry bellwethers Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) carry a cumulative 43% weighting, making the $300 million fund particularly suitable for active traders who want a bullish leveraged bet on these names. The fund's daily volume of nearly 2 million shares, coupled with an average 0.06% spread, keeps trading costs manageable. As of Feb. 6, 2020, ERX issues a 1.55% dividend yield and has plunged 32.63% year to date.

ERX shares have traded within an orderly six-point descending channel over the past seven months, providing an opportunity for range-bound traders. Those who buy the recent rally from the pattern's lower trendline should look for a move to its opposing side at $18. The trade offers a favorable risk-to-reward reward ratio of 1 to 4.4, assuming a stop-loss order placed below support at $12 and a fill at Wednesday's $13.11 closing price ($1.11 loss per share vs. $4.89 profit per share).

Chart depicting the share price of the Direxion Daily Energy Bull 3X Shares (ERX)

Invesco Dynamic Energy Exploration & Production ETF (PXE)

With assets under management (AUM) of $26.92 million, the Invesco Dynamic Energy Exploration & Production ETF (PXE) seeks to track the performance of the Dynamic Energy Exploration & Production Intellidex Index. The fund holds about 30 U.S. energy exploration and production companies weighted by growth and value metrics, with its top 10 holdings accounting for about 50% of the portfolio. Traders should use limit orders rather than market orders, given share turnover and spreads can be sporadic at times. PXE carries a middling 0.63% expense ratio and has returned -21.89% as of Feb. 6, 2020.

The ETF's share price tumbled below critical support at $13.50 in late January but promptly bounced back above this level in Wednesday trade, creating a possible bear trap. Those who buy the fund should set a take-profit order near $17 – an area where price may encounter overhead resistance from the December/January swing high. Think about placing a stop order below the 2020 low at $11.55.

Chart depicting the share price of the Invesco Dynamic Energy Exploration & Production ETF (PXE)

SPDR S&P Oil & Gas Equipment & Services ETF (XES)

Formed in 2006, the SPDR S&P Oil & Gas Equipment & Services ETF (XES) seeks to provide a return that corresponds similarly to the S&P Oil & Gas Equipment & Services Select Industry Index. Leading names in the ETF's equal-weighted basket include Helmerich & Payne, Inc. (HP), Halliburton Company (HAL), and National Oilwell Varco, Inc. (NOV). Reasonably tight spreads and ample share volume make the fund a favorite among energy bulls. As of Feb. 6, 2020, XES controls $186.17 million in net assets, charges a 0.35% management fee, and is trading nearly 20% lower since the start of the year. Investors also receive a 1.43% dividend yield. 

XES shares have rebounded at the base of a mountain-like chart pattern that formed over December and January. Traders who open a long position should take profits near $8, where price may run into resistance from a prominent downtrend line and the 200-day simple moving average (SMA). Limit downside risk with a stop placed beneath either yesterday's low at $6.75 or the Jan. 31 low at $6.44, depending on personal risk tolerance.

Chart depicting the share price of the SPDR S&P Oil & Gas Equipment & Services ETF (XES)
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