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Oil has been surging in recent months due to tightening supply conditions during the period of peak demand. Given this backdrop, investors could tap the bullish trend in the sector with the help of leveraged ETFs to make quick profits, as these funds could see huge gains in a very short time frame.

Funds that could benefit include ProShares Ultra Oil & Gas ETF (DIG - Free Report), Direxion Daily Energy Bull 2X Shares (ERX - Free Report), Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares (GUSH - Free Report), MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report), and MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN (OILU - Free Report).

Solid Trends

The two major oil-producing nations, Saudi Arabia and Russia, extended their voluntary cuts by the end of the year. Saudi Arabia has extended its voluntary oil output cut of 1 million barrels per day (bpd) for another three months until the end of December 2023. Russia extended its oil export cuts by 300,000 bpd until the year's end.

The declining inventories in the United States have also added to the tight supply conditions. Per the recent data from the Energy Information Administration, inventories have fallen to their lowest level this year, plunging 10.6 million barrels in the week ending Aug. 25. Additionally, surprise industrial outages and hurricane-related disruptions to U.S. production are keeping the market tight.

Simultaneously, optimism around demand recovery is growing. Last month, the downturn in Eurozone manufacturing showed signs of easing, indicating that the worst may be over for the region's struggling factories. Additionally, an unexpected rebound in China provided hope for economies reliant on exports.

This combination of economic improvements will fuel demand. Both OPEC and the International Energy Agency are banking on China, the world's largest oil importer, to bolster oil demand throughout 2023.

Further, the oil futures market is currently in a state of backwardation, where later-dated contracts are cheaper than near-term contracts in the oil futures market. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. This trend is likely to continue, at least in the near-term, acting as the biggest catalyst for the commodity.

Any Worries?

A return of additional barrels from Iran, as well as the possibility of the United States ending its curbs on Iran and Venezuela, could increase supply. On the other hand, persistent concerns about economic growth in the world’s two largest economies, the United States and China, could weigh on demand.

Here, we have profiled the ETFs mentioned above.

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

This fund seeks to deliver two-times (2X or 200%) the daily performance of the S&P Energy Select Sector Index. It has been able to manage $136.3 million in its asset base, and it trades in a good volume of about 64,000 shares per day on average. DIG charges 95 bps in fees per year.

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

This fund maintains a two-times leveraged position in the Energy Select Sector Index, while charging 92 bps in fees a year. The fund is a popular and liquid option in the energy leveraged space, with AUM of $429.7 million and an average trading volume of around 738,000 shares.

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 $686.9 million in its asset base, and the average daily volume is solid at around 1.2 million shares. The fund charges 93 bps in annual fees.

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

This fund provides three-times (3X or 300%) 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. The fund has been able to manage $2 billion in its asset base while trading in an average daily volume of 64,000 shares. Its expense ratio is 0.95%.

MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN (OILU - Free Report)

This fund is linked to three-times leveraged performance of the MicroSectors Oil & Gas Exploration & Production Index. The index provides exposure to the large-capitalization companies that are domiciled and listed in the United States and active in the exploration and production of oil and gas.

The fund has amassed $72.4 million in its asset base, and it trades in a lower average volume of 133,000 million shares. It charges investors 95 bps in annual fees and expenses.

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, any of the products listed above may be worth considering. Clearly, a near-term long could be intriguing for those with high-risk tolerance and those that believe that the trend is a friend in this corner of the investing world.

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