MicroSectors OILU ETN: To Bring An Outsized Christmas Present

MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETNs (NYSEARCA:OILU) gives you the ability to play volatile moves in the oil and gas sector with bets that outperform regular market moves. With a possible floor to oil prices being supplied by Saudi Arabia and the United States government, the risk of future oil volatility appears to be skewed to the upside making a leveraged play a possible home run if expectations play out. As a large bet in my portfolio, I hope to make an outsized return in the position over the next few months. However, it won’t be too detrimental to my portfolio if oil prices do continue to slide.

The latest report from the Biden administration is that it is considering refilling the Strategic Petroleum Reserve SPR again now that prices of barrels of oil have come back down to around $80 a barrel. This coincides with Saudi Arabia hinting at possible future OPEC+ cuts to output to support oil prices at the end of August of 2022. While the U.S. government and Saudi Arabia are now both just talking about supporting oil prices at these levels, any actual actions might support a turnaround in oil prices over the rest of the year.

President Biden authorized the release of 180 million barrels of oil from the SPR to help bring global oil prices down after prices spiked to 14-year highs after Russia’s invasion of Ukraine. According to a Department of Energy’s website, the SPR is currently authorized to hold up to 714 million barrels of oil. The SPR was at a peak in December of 2009 at around 726 million barrels and since then has been sold off to a current standing of around ~385 million barrels as of August 31, 2022. These drawdowns of the SPR have left the U.S.’s emergency oil stash at its lowest level since 1984.

With the SPR hanging out at lows not seen since 1984 it should be little wonder the Biden administration is growing concerned over the remaining balance, especially as global concerns do not seem to be diminishing. The Russia/Ukraine war still seems to be in full force as the instigator of recent oil price volatility over the past year with no clear end in sight.

Russia and China also seem to be re-establishing relations as Xi traveled to Kazakhstan ahead of a summit with Putin. This was Xi’s first international trip since the start of the COVID-19 pandemic. Global oil prices have moderated over the past few months partly because Russia has been able to continue to sell its oil to countries like China and India even as Europe and the U.S. have called for sanctions on Russia due to its war with Ukraine. Any aggressive change in China’s stance towards Taiwan in the coming months/years could create another outsized move in oil prices, similar to when Russia invaded Ukraine, especially if Russia and other countries side with China over its control of Taiwan.

As Russia and China work on relationship building, the G7 aims at potentially imposing a price cap on Russian oil by December of 2022. This could coincide roughly with the start of planned European Union sanctions banning seaborne imports of Russian crude. Future events are always hard to predict, but possible enhanced volatility in oil prices around the end of the year due to these measures, and to Russia’s potential responses could easily be warranted.

Consider these end of the year potential events now with the fact that crude oil prices are now hovering around prices before Russia’s invasion of the Ukraine in February of 2022.

The recent drop in oil prices might offer the perfect entrance point for investors seeing enhanced volatility around oil prices to end the year. An aggressive Russian response to U.S. and European end of the year actions could conceivably get prices back to levels seen just a few months ago especially if any nuclear options were enhanced or used by any parties. Just regaining levels from a few months ago would mean an over ~40% return using regular oil options and pricing.

For those seeing this potential movement in oil prices in the coming months, maybe a more volatile ETN like Microstrategies OILU might be in consideration. Here is how OILU has performed compared to oil prices over the same time period over the past year.

A rapid spike in oil prices again at the end of the year could in theory bring OILU share prices back to highs it saw a few months ago around $84 a share. This would mean a potential return from today’s prices of almost ~80%, or almost double what a return to oil price highs would bring a regular oil investor.

This increased upside also means the investor has increased downside risk if oil prices continue to collapse over the next few months as they have over the past few months. This risk is best minimized in my mind by making an investment in OILU smaller than your other investments. For example, my current personal investment in Petrobras (PBR) (PBR.A) is ~$65,000 while my investment in OILU is less than 15% of that at ~$9,500. A big enough position to make a difference in my monthly/yearly performance if I am right, but not big enough to sink my portfolio if my thesis is wrong and oil prices continue to head south.

Oil prices have collapsed markedly from prices seen just a few months ago which seems to be triggering a response both from the U.S. government as well as countries like Saudi Arabia. With a potential price floor being implemented by both of these majors, the risk/reward of future oil prices might be skewed upward in the coming months especially with catalysts like end of the year price caps and sanctions going into effect against Russia. Investors interested in capturing outsized energy stock returns over the rest of 2022 should consider an ETN like OILU as a small possible addition to their portfolio. Best of luck.