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US Energy: Pensive Recovery or Primed and Ready?

The energy sector has stumbled a bit after recovering to near pre-pandemic levels earlier this summer. With a new White House administration emphasizing renewable energy and uncertainty in the status of global reopening plans, the U.S. energy sector doesn’...

Benzinga · 09/01/2021 16:41

The energy sector has stumbled a bit after recovering to near pre-pandemic levels earlier this summer. With a new White House administration emphasizing renewable energy and uncertainty in the status of global reopening plans, the U.S. energy sector doesn’t exactly know where it’s headed. 

Energy companies see the writing on the wall when it comes to carbon emissions sensitivity and many have released plans to be net carbon zero by 2050. This shift, however, won’t come quickly, and there will be winners and losers along the way. Picking those winners and avoiding the losers can be a lucrative but challenging proposition for traders. Instead, it may make more sense to look at the movement of the energy sector as a whole.

There’s an Index for That

Standard & Poor’s (S&P) Energy Select Sector Index (NDEXSP: IXE) allows investors to gauge the overall sentiment of the energy sector by aggregating 22 of the largest U.S. energy companies into one index. This index reflects the recent consolidation that the energy companies have experienced since the middle part of July. However, the sector is in a longer-term uptrend, riding the post-pandemic recovery wave. 

Therefore, bullish investors may see this consolidation as a good entry point, believing that energy is poised for continued upward movement into the fall. That bullish sentiment is further bolstered by lenders who seem happy to continue lending to energy companies, believing that the second half of 2021 will see a generous uptick in energy consumption as reopening efforts continue to drive demand. 

For traders looking to make this bullish play, there is Direxion’s Daily Energy Bull 2X Shares (NYSE:ERX). This exchange-traded fund (ETF) is based on the S&P Energy Select Sector Index and gives traders 2 times daily leveraged exposure to the top names in U.S. energy production.

Leaner and Cleaner is the Name of the Game

Looking ahead to the future of energy production, there’s no mistaking that changes are looming on the horizon. Energy companies across the board will need to be both leaner and cleaner. This means investing capital into partnerships and joint ventures with clean energy companies as well as innovating internally. Business models will also change. As the need for efficiency grows, digitalization will be an increasingly important driver in that process. 
One great example of these trends is Phillips 66 (NYSE:PSX), a member of the S&P Energy Index. Phillips 66 recently announced an investment into Novonix, an Australian-based materials supplier for lithium-ion batteries. In a press release, Greg Garland, chairman and CEO of Phillips 66 said, “This strategic investment enables Phillips 66 to directly support the development of the U.S. battery supply chain.” Such innovation and vision from members of the S&P Energy Select Sector Index is a good indication that these companies don’t plan on staying stagnant as the ground shifts below them.

Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged, or daily inverse leveraged, investment results and intend to actively monitor and manage their investment.

ERX Top 10 Index Holdings (as of 06/30/2021)

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