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Due to the uncertainty that COVID-19 was going to have on the global economy in general, and crude oil specifically, West Texas Intermediate (WTI) front-month futures contracts closed at a negative price in April 2020. WTI represents the price for future delivery of a barrel of WTI crude oil. Since June 2020, WTI front-month futures contracts have traded between $34-$43 per contract. As of December 2020, WTI closed above $46 for the first time since early March 2020.
There are a pair of exchange traded notes that offer sophisticated investors exposure to oil stocks who believe that WTI and relatedly, large oil company stocks may rise or fall in the future.
Many sophisticated investors who believe oil stocks will continue to rise and want to invest with leverage have turned their attention to the MicroSectors U.S. Big Oil Index 3X Leveraged ETN
Alternatively, on the bearish side, many sophisticated investors have invested in the MicroSectors U.S. Big Oil Index -3X Leveraged ETN NRGD 11.86%
. NRGD attempts to deliver 300% of the inverse daily performance of the same index.
Upsizes for Both NRGU and NRGD
Both ETNs have been upsized numerous times in 2020, which is likely the result of a few factors. First, NRGU and NRGD are the 3x leveraged and -3x inverse leveraged, respectively, exchange traded notes with exposure to the U.S. energy sector listed in the U.S. Second, within the US energy sector, the price of crude oil futures has experienced unprecedented levels of volatility this year. In addition, on April 20, 2020, for the first time in history, the front-month WTI futures contract traded at a negative price.
Since that day, the Solactive MicroSectors™ U.S. Big Oil Index has had periods of outperformance and underperformance compared to the S&P 500 Index and the Bloomberg WTI Crude Oil Subindex. The Bloomberg WTI Crude Oil Subindex is a single commodity subindex composed of futures contracts on crude oil.
As a result of these periods of heightened volatility, sophisticated investors may have increased their use of the daily leverage provided by the ETNs to make bullish or bearish investments linked to companies that operate in this sector. As a result of the rising demand for these ETNs in 2020, Bank of Montreal upsized NRGU 13 times and NRGD twice.
BENZINGA