Summer Driving Season: A Gasoline ETF To Hedge Against Higher Fuel Prices (UGA, USO, BNO)

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April 19, 2011 1:40pm NYSE:BNO NYSE:DBO

Spring’s bloomed all ‘round my neck of the woods. Golden Poppies festoon the roadsides, brightening the landscape otherwise made gloomy by the signage announcing the ever-escalating

 price of petrol.

Retail pump prices are changing daily now, playing catch-up with the 15 percent hike in wholesale prices over the past month.

Like the emergence of the poppies each spring, gasoline prices inflate as improving weather and holiday breaks entice motorists to take to the highways. The annual inflection point—for refiners and motorists alike—is the bullish crossover of petrol’s price over heating oil’s.

We reached that point last week.

Product Yields Per Barrel Of Crude: Gasoline (RB) Vs. Heating Oil (HO)

Product Yields Per Barrel Of Crude: Gasoline (RB) Vs. Heating Oil (HO) 

Wholesale gasoline prices tend to cycle more dramatically than the prices of other refined products, generally bottoming in the fall and peaking in the spring. In four of the past five years, motor fuel advanced to a premium over middle distillates (2008 was a clear outlier following the speculative blowoff in the petroleum complex and demand destruction) as summer approached.

This is now the time for refineries to make their real money. It’s a narrow window, though. By the second or third week in May, the price momentum fades. Right now, gross refining margins for gasoline-rich runs are above those realized at 2010’s spring peak. And there’s still a month of upward momentum likely left in motor fuel’s price trajectory.

Gross Refining Margins

Gross Refining Margins

So what does this mean for investors (and, in turn, motorists)? Gasoline blendstock’s trading at the $3.22/gallon level now and seems to be consolidating after clearing the last key retracement level of its 2008 decline. Bulls seem to have the 2008 peak price of $3.63 in their immediate sights, though the charts indicate the market’s advance could stretch all the way to $4.05/gallon.

Emphasis should be placed on the word “could.” Demand destruction can put the kibosh on petrol’s advance to that level. Extrinsic factors, too, just like the 2008 market’s, could also dampen speculative interest in the petroleum complex.

In my part of the country, pump prices are typically a dollar above the national wholesale price, so I’m looking at the prospect of $5/gallon fuel. Ouch!

The hedge for investors and motorists is the United States Gasoline Fund (NYSE:UGA), a futures-based portfolio holding front-month blendstock contracts. The gasoline market’s near-term backwardation—where back-month prices are discounted below those of front-month contracts—favors fund holders with a positive roll yield that can augment the spot return.

That’s a good thing, because the drag of the fund’s prior contango kept UGA from getting as close as possible to its 2008 peak as spot gasoline. The next hurdle for UGA—now at the $53-$54 level—is a retracement step between $56 and $57.

Time could run out before an assault is made on UGA’s 2008 peak at $67.66. In any event, UGA’s one of the ETFs to watch over the next month. That is, if you can do so while driving down the highway.

Related ETFs: United States Oil ETF (NYSE:USO), PowerShares DB Oil ETF (NYSE:DBO).

Written by Brad Zigler From Hard Assets Investor (HAI) is a research-oriented Web site devoted to sharing ideas about hard assets investing. The site has been developed as an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures and gold (the three major components of the hard assets marketplace). The site will focus on hard assets investing without endorsing or recommending any particular investment product.

This article is being distributed courtesy of Copyright All Rights Reserved.

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