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Energy has been outperforming this year buoyed by the expectation of swift global economic recovery that has ramped up the demand for energy. Rapid vaccination rollout, more vaccine progress, and a new $1.9 trillion stimulus bode well for the economy. The latest upbeat economic data from the United States and China also bolstered confidence in economic recovery.

Along with a brightening demand outlook, tightening supply conditions are also giving a boost to the oil price. This is especially true as the Organization of the Petroleum Exporting Countries (OPEC), Russia, and the oil-producing allies last week agreed to extend their production cuts into April.

Additionally, a latest attack on a key Saudi Arabian refining facility — Ras Tanura on the Persian Gulf — has led to disruption in oil supply in the Kingdom's oldest and largest refinery and a key hub for its market-leading exports. The terminal is capable of exporting roughly 6.5 million barrels a day — nearly 7% of oil demand. The attack follows a recent escalation of hostilities in the Middle East region after Yemen’s Houthi rebels launched a series of attacks on Saudi Arabia. Additionally, a severe cold snap in Texas and the other parts of southern United States last month knocked out production of roughly 4 million barrels per day.

Notably, oil price has gained more than 30% so far this year. Brent topped $71 per barrel for the first time since January 2020 while U.S. crude hit the highest in more than two years.

Added to the positive sentiment is the state of backwardation in the oil futures market, where later-dated contracts are cheaper than the near-term contracts. Per CME Group data, Brent futures for June delivery were trading about 54 cents below May contracts at the time of writing. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. This trend is likely to persist at least in the near term, acting as the biggest catalyst for the commodity.

Given the bullish trends, a raft of investment banks raised their oil price forecasts. Goldman Sachs (GS) estimates that Brent will top $75 a barrel in the second quarter and $80 a barrel in the third quarter, up $5 per barrel each from the previous forecast. JP Morgan (JPM) expects oil prices to peak at $80 per barrel in the second quarter of calendar year 2022.

How to Play?

Amid the strong optimism, many investors have turned bullish on the energy sector and are seeking to tap this opportunity. For them, a leveraged play on energy could be an excellent idea as these could see huge gains in a very short time frame when compared to the simple products.

Below, we have highlighted the leveraged ETFs that could be excellent picks:

ProShares Ultra Oil & Gas ETF (DIG - Free Report)

This ETF seeks to deliver twice (2X or 200%) the daily performance of the Dow Jones U.S. Oil & Gas Index. It has been able to manage $228.4 million in its asset base and trades in a good volume of about 103,000 shares per day on average. DIG charges 95 bps in fees per year and gained about 82% so far this year.

Direxion Daily Energy Bull 2X Shares (ERX - Free Report)

This fund creates two times leveraged position in the Energy Select Sector Index while charging 95 bps in fees a year. It is a popular and liquid option in the energy leveraged space with AUM of $721.4 million and an average trading volume of around 5.7 million shares. ERX has surged 83.7% in the same time frame.

Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares (GUSH - Free Report)

This fund offers two times exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $963.8 million in its asset base and the average daily volume is solid at around 2.5 million shares. The ETF charges 95 bps in annual fees and has gained 109% this year.

MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report)

This ETN provides three times leveraged exposure to the Solactive MicroSectors U.S. Big Oil Index, which is equal-dollar weighted and provides exposure to the 10 largest U.S. energy and oil companies. It has been able to manage $534 million in its asset base while trading in an average daily volume of 381,000 shares. Expense ratio comes in at 0.95%. The fund is up 154.6% this year.

Bottom Line

As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing — when combined with leverage — may make these products deviate significantly from the expected long-term performance figures.

Still, for ETF investors who are bullish on the energy sector for the near term, either of the above products can be an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the trend is the friend in this corner of the investing world.