Escalating Middle East Tensions Shine Massive Spotlight On Direxion's Oil-Focused GUSH, DRIP ETFs

Although the electoral victory of now-President Donald Trump during the 2024 political campaign helped briefly invigorate the hydrocarbon sector, oil stocks eventually succumbed to downward pressure. With the Trump administration implementing sweeping tariffs on key economic partners, the paradigm shift in the geopolitical framework created a cloud of uncertainty. Cynically, though, escalating tensions in the Middle East have renewed interest in fossil fuels.

Last week, Israel launched an attack on Iran, targeting nuclear energy and military sites. Fundamentally, the Israeli government views Iran as an existential threat. For many Americans, though, the main concern is whether or not the U.S. will get dragged into the conflict. Recently, lawmakers — including Sen. Bernie Sanders (I-VT) — expressed deep reservations about the attack and the possibility of U.S. involvement.

A major concern that could cynically bolster the price of oil is the strategic chokepoint of the Strait of Hormuz. Located between Iran and Oman, this waterway narrows to just two shipping lanes of only 2 nautical miles each, which greatly endangers global oil flows. Commodity analyst Daan Struyven warned that if Iranian oil infrastructure is damaged, it’s possible that Brent crude could briefly spike above $90 per barrel.

Even more worrying, a wider escalation of the conflict may impact the strait, which could then push the price into triple-digit territory. Notably, almost a third of the world’s seaborne oil moves across the passageway, setting the stage for potential mass disruption.

Outside factors can also contribute to a bullish backdrop for the oil market. While the Federal Reserve has kept interest rates steady due to inflation data not supporting rate cuts, shifts in economic viability may force the central bank into a more accommodative stance. If so, a dovish monetary backdrop could lift oil prices.

Still, not every data point supports hydrocarbons. A key factor to consider is supply. In recent years, U.S. oil production has hit record levels, applying downward pressure on prices. As such, investors may have both fundamental and technical headwinds to consider. With the Trump administration’s big push toward energy independence, a risk exists that oil stocks could hit a technical plateau.

Moreover, it’s worth pointing out the demand-side pressure. Thanks in part to the aforementioned tariffs, economic activity has slowed, leading to less consumption of oil. In addition, electric vehicle sales are booming, and there’s little evidence that the trend is declining. More legacy automakers are entering the electric fray, which may eventually drag down oil prices.

The Direxion ETFs: With compelling narratives on both sides of the aisle, traders have ample opportunity to attempt to extract short-term profits. For those seeking a straightforward way to speculate on oil, financial services provider Direxion offers two relevant products.

First, for optimistic traders, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull GUSH seeks the daily investment results of 200% of the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. Second, for pessimistic market participants, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares DRIP seeks 200% of the inverse performance of the aforementioned index.

In both cases, the main point of intrigue is the offering of a convenient mechanism for speculation. Typically, those interested in leveraged or short trades must engage the options market. However, the underlying derivative instruments feature unique complexities that may not align with every investor’s needs. With Direxion ETFs, the units can be bought and sold much like any other public security, thus mitigating the learning curve.

Nevertheless, prospective buyers should be aware that leveraged and inverse ETFs carry significant risks. Primarily, traders must be cognizant of the often-extreme volatility that can erupt with these funds. Further, these Direxion ETFs are designed for exposure lasting no longer than one day. Holding beyond the recommended period may lead to positional decay due to the daily compounding effect.

The GUSH ETF: Since the start of the year, the GUSH ETF has lost roughly 8% of value. However, momentum from the geopolitical crisis has boosted GUSH by over 15% in the past month.

• Previously, in late May to early June, GUSH’s 50-day moving average acted as a support line. Since Israel’s attack, the bull fund has been rocketing higher on strong volume.
• The next several sessions will represent a major test for GUSH, particularly as it seems to have encountered resistance at the 200 DMA.

The DRIP ETF: While circumstances appeared positive for the bear fund, the DRIP ETF has now fallen more than 19% on a year-to-date basis.

• In an almost inverse scenario to GUSH, the DRIP ETF encountered resistance imposed by the 20-day exponential moving average between late May to early June.
• With the geopolitical crisis, DRIP has fallen on strong distributive volume. However, the bears may be attempting to build a baseline of support at the $9 level.

Featured image by Az1975 from Pixabay.