As global demand for crude oil continues to increase to record levels and supply remains constricted, the price of gasoline continues to itch upwards, passing the $3 per gallon mark in October and giving support to the United States Gasoline Fund (NYSE:UGA), the PowerShares DB Energy (NYSE:DBE), the iShares Dow Jones US Oil & Gas Ex Index (NYSE:IEO) and the Vanguard Energy ETF (NYSE:VDE).
According to the American Petroleum Institute, worldwide demand for crude oil in 2010 hit a record of more than 87 million barrels per day and in the coming year this number is expected to increase as appetites in China, the Middle East and India continue to grow and witness increasing purchasing power. Further demand support in the current year is expected to come from developed countries, such as the United States and Germany, as they continue to witness improvements in economic climate.
Although demand for gasoline appears to be insatiable, the true imbalance appears to be coming on the supply side. According to the US Energy Information Agency, the drilling moratorium imposed by the Obama Administration in the Gulf of Mexico is expected to curtail oil production by nearly 120,000 barrels per day in 2011 as many companies are struggling to secure the permits necessary to drill. Furthermore, OPEC production caps have constricted supply as has weak production growth in non-OPEC countries, states Steve Hargreaves of CNN Money.
As mentioned above, some ways to play gasoline include:
- United States Gasoline (NYSE:UGA), which is a pure play on gasoline through futures contracts. One thing to keep in mind with UGA is the effect that contango and backwardation could have on returns, which could cause the ETF to deviate from the actual performance of gasoline.
- PowerShares DB Energy (NYSE:DBE), which utilizes futures contracts to gain access to the energy sector as a whole. DBE allocates nearly 23.6% of its assets to gasoline futures contracts.
- iShares Dow Jones US Oil & Gas Ex Index (NYSE:IEO), which is an equity play on the oil and gas exploration industry and includes Occidental Petroleum Corp (NYSE:OXY), Apache Corporation (NYSE:APA) and Anadarko Petroleum Corp (NYSE:APC) in its top holdings.
- Vanguard Energy ETF (NYSE:VDE) is a diversified energy ETF play which boasts 161 holdings. Top holdings include petroleum giants ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP), which are heavily involved in nearly every aspect of gasoline production.
Written By Kevin Grewal From ETF Tutor Disclosure: No Positions
Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor’s degree from the University of California along with a MBA from the California State University, Fullerton. He is a contributing author on The Street – his articles can also be found published on various sites including Yahoo! Finance, The Globe and Mail , Daily Markets, MSN Money, Seeking Alpha, Fidelity Investments, Traders Library, and Minyanville.