How To Profit From Surging Gasoline Prices (USO, XOM, SUN, BP, HES, CVX, COP, XLE, UGA)

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March 2, 2012 11:34am NYSE:UGA NYSE:USO

Patrick Vail:  February is typically a month when gas prices recede – but not this year.  Average gas prices currently are about $3.69 according to AAA’s Daily Fuel Gauge Report. That’s higher than the average for the whole  of 2011, which was the priciest year ever for gasoline.

The average price for U.S. gas has climbed more than 10%  in just the past two months. This suggests a trajectory that could produce a  spike of 60 cents a gallon or more by May.

“I actually believe that prices will be moving higher than 60 cents a gallon on  average,” Money Morning energy expert Dr. Kent Moors recently told Executive Editor William Patalon III. “By mid-summer, in fact, we  could see $5 a gallon being reached in certain regions of the U.S. market.”

Here’s why we could be facing the most painful year at the  pump – and how you can offset record-breaking gasoline costs. 

What’s Driving U.S. Gas Prices to $5 a Gallon

Usually, higher gas prices result  from low supply and high demand, but that’s not the case this year. Even with consumption growing in emerging  markets like China and India,  the current surge in gas prices isn’t based on increased demand for crude oil.

In fact, according to Tom Kloza,  chief oil analyst for the Oil Price  Information Service (OPIS), demand for oil  is at its lowest point since April 1997.

Instead, there are a new set of factors pushing U.S. gas  prices higher, including:

1. An  Escalation in Mideast Turmoil

Iran’s  nuclear standoff with the United States and Israel has escalated. Iran two  weeks ago indicated its intention to impose fuel squeeze on Europe in  retaliation for an impending boycott of Iranian oil. Iran has also threatened  to blockade the Strait of Hormuz, through which 20% of the world’s oil supply travels.

What’s more, the humanitarian crisis in Syria, which just  prompted a new round of sanctions from the EU in addition to an existing  embargo on Syrian oil, has contributed to fears of regional instability.

2. Pinched  Refinery Capacity

Refiners are getting squeezed by higher crude prices, forcing  some to shut down rather than operate at a loss.

ConocoPhillips (NYSE:COP)  recently closed three Philadelphia-area refineries that together represent  about half of the refining capacity in the Northeast United States. Sunoco Inc. (NYSE:SUN) has idled a refinery in  nearby Marcus Hook, PA. The Hovensa refinery in the U.S. Virgin Islands, a  partnership between Hess Corp. (NYSE:HES) and  Petroleos de Venezuela SA, closed in mid-February to stem $1.3 billion in  losses over the last three years. A fire shut down the BP PLC (NYSE:BP)  refinery in Blaine, WA, which was responsible for one-fifth of that state’s  gasoline.

“Some of those refineries represented the key to a smooth  spring transition from winter to spring gasoline,” OPIS’ Kloza said of the  closed facilities.

3. Speculative Money

Kloza attributes the rise in gas  prices to hedge funds and big money managers buying up gasoline futures  contracts.

“We’ve seen about $11 billion of  speculative money come in on the long side of gas futures,” said Kloza.

So the current high prices are based  on little more than the expectation that gas prices are set to rise even  higher.

“Speculation  is now part of the DNA of oil prices,” Fadel Gheit, a 30-year veteran of energy  markets and an analyst at Oppenheimer & Co., told McClatchy Newspapers.  “You cannot separate the two anymore. There is no demarcation.”

Demand  might be down and supply might be up, but there’s no shortage of factors edging  gas prices higher. When those factors combine with rising demand in spring and  summer, pump prices will skyrocket.

Profiting From the Gas Price Spike: UGA, USO, COP, XLE

Fortunately, there are several  ways to hedge against a rise in gas prices.

Perhaps the easiest way to  profit is to invest in an exchange-traded fund (ETF) that tracks the price of  gasoline.

The United States Gasoline Fund  LP (NYSEArca:UGA) invests in  futures contracts on unleaded gasoline traded on the New York Mercantile  Exchange (NYMEX). UGA rose 14.8% in 2011, and is up about 16% so far in 2012.

If gas prices jump as analysts  expect, UGA should jump again, as well. In 2008, when gas prices reached a high  of $4.11 per gallon, UGA was trading over $66, which is 17% above its current  level.

You might also consider United  States Oil Fund LP (NYSEArca:USO), which invests in futures contracts for light, sweet crude  oil traded on the NYMEX. USO is up 8% since the beginning of February, and is  currently trading about 10% below its 52-week high of $45.60. In the summer of  2008, USO hit $104.44, more than 150% above where it’s trading today.

Another easy way to gain  exposure is to simply buy the oil companies themselves. Consumers are most  familiar with the fully-integrated major oil companies, which handle every  aspect of the oil and gas industry, from exploration and drilling to marketing  and retail sales.

“Most of the integrated majors  will do well,” Money Morning Capital Waves Strategist Shah Gilani told Fox  Business’ Stuart Varney last week.

Over the past six months, these  household names have been on the rise: Exxon Mobil Corp. (NYSE:XOM) is up 19.5%; BP plc is up 23.9%; Chevron Corp. (NYSE:CVX) is up 13.1%; and ConocoPhillips (NYSE:COP) is up over 17.05%.

“I like ConocoPhillips. I think  it’s going to be one of the winners if oil prices continue to rise and gasoline  prices spike,” said Gilani. “Conoco is great. It’s going to increase its  margins both on the oil and exploration side, and on the refining side. I like  their expansiveness in terms of their refining operations, and they’re sitting  on some nice reserves. It’s got a 3.6% dividend yield which helps you buy some  gasoline in these environments. I think it’s a great stock all around.”

If you want to invest in more  than one company, you can go with the Energy Select Sector SPDR (NYSEArca:XLE),  which tracks the performance of the Energy Select Sector Index. It includes  exposure to large-cap U.S. oil and gas companies like Chevron and Exxon, and  will enjoy a boost when gas prices rise even higher in the coming months.

Written By Patrick Vail From Money Morning

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