What a great contrast! While the otherwise surging U.S. markets ended August on a three-year low note (as a basis of monthly performance) and U.S. index futures are on a retreat, oil – the prolonged pain for investors – staged a rally. Oil has been trapped in a downward spiral since mid 2014. For over one year, there was hardly any relief for oil prices.

Supply glut, be in the U.S. or in the other oil-rich nations, and global growth worries that resulted in demand concerns were responsible for the collapse in the oil prices. However, oil signaled a turnaround last Thursday, jumping over 10% and representing the biggest one-day rally in over six years. Gains kept rolling even on Friday and Monday, marking the largest three-day oil price gain in 25 years. This matters a lot for a commodity like oil, the price of which declined over 60% in the last one year (read: Oil Tumbles to Six-Year Low: ETF Tale of Two Sides).

In particular, the U.S. economy grew 3.7% in Q2, which beat the initial reading of 2.3% growth and 0.6% expansion recorded in the seasonally weak Q1. While this ruled out some demand-driven worries, the calm in the stock market turbulence in the latter part of last week and lower inventory crude stockpiles in the U.S. initiated this bright spell (read: Positive News Flow Sparks Off Rally in Oil ETFs).
 
On August 31, oil futures added over 8%. The optimism originated from the indication that the Organization of Petroleum Exporting Countries (OPEC) may cut back on production. Moreover, the U.S. government also reduced its estimate of domestic oil output. Domestic production in June was 9.3 million barrels a day, about 100,000 barrels short of the earlier prediction. Plus, the biggest synthetic crude oil manufacturer in Canada stopped production following a fire, which in turn boosted Canadian oil prices, per Reuters.
 
A few analysts believe that these extra-ordinary gains in oil prices actually overprized the recent positive news. Compelling valuation is yet another reason for the bounce. So while positive news drove up all oil ETFs, fat gains were tied to the leveraged oil plays.

Post oil price recovery, leveraged oil ETFs 3x Long Crude ETN (UWTI) with triple leverage and Ultra DJ-UBS Crude Oil (UCO) with double exposure to the index added over 72% and 45%, respectively, in the last five trading sessions (as of August 31, 2015). Over the last three-day period (as of August 31, 2015), the funds were up 81% and 50%, respectively (read: 10-Minute Guide to 10 Most Popular Leveraged ETFs).

However, investors should note that leveraged ETFs are apt for short-term trading due to their extremely volatile nature. This is even truer for oil as this investing zone can be touted as one of the most risky plays. Global recovery is yet to be full-fledged with several economies tottering.
So, demand-driven concerns are well in place. Now, recovery depends on when production cut takes place, if at all it happens. So, investors need to be vigilant while investing in the leveraged oil ETFs.

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