Playing Higher Oil and Gasoline Prices With ETFs (USO, BNO, UGA, UCO, XLE, XOP, IEZ)

gasoline pricesSean Brodrick: Ouch! Americans are feeling the pinch at the pump as gasoline prices surge.

Prices recently jumped to an average of $3.60 per gallon, according to AAA’s Daily Fuel Gauge Report. This represents the highest level since October.

This is happening even though America’s crude oil production is booming. In fact, the U.S. pumped 7.06 million barrels a day (bpd) in the week ended Feb. 8, up more than 21 % year-over-year.

We are swimming in U.S. crude. But gasoline prices are up more than 12% in less than two months.

Make that double-ouch!

I told you last week (“5 Ways We’re Cashing in on the Oil and Gas Boom”) how gasoline prices aren’t really hooked to domestic oil — it’s international oil that really matters, because the U.S. still imports a lot of the oil we turn into gasoline.

The price of Brent Crude, an international benchmark, is rising. Check out this chart from Bespoke Investment Group …

Source: Bespoke Investment Group

You can see that Brent is rising, and gasoline is going right along with it. This is despite the fact that the International Energy Agency (IEA) just lowered its estimate for global oil demand in 2013 to 90.68 million bpd, down 85,000 bpd from its previous month’s estimate.

The IEA is worried that the global economic recovery isn’t sustainable.

And so, the price of Brent is also rising even though global oil production is up — gaining about 2 million bpd over the past two years.

So What The Heck Is Going On?

A couple of things …

First, to keep prices high, the Saudis are pumping a lot less oil. Combined OPEC oil production fell to 30.34 million bpd in January, a 52-week low. The Saudis pumped 9.25 million bpd, well-below their capacity of 12 million bpd.

Just remember — the less of the world’s total oil that OPEC supplies, the less power it has.

The other factor is speculation. Yep, speculators are bidding up the price of oil. They disagree with the IEA, and think the global economy is coming along fine. Speculators expect that China’s economic engine is going to kick into gear, grow 8.5% or more this year, and suck down oil by the mega-barrel.

How High Could Brent Go?

The price of Brent crude just broke out to the upside. It recently traded at $117.75, but simple technical analysis gives a target of at least $140 per barrel.

That’s about 19% higher from recent prices, and that’s a fortune to be made in the oil markets. This doesn’t mean it has to go that high —  but the potential is there.

One important point for gold investors —  rising gasoline prices can be seen as an indicator that inflation is heating up. Gold is an inflation hedge.

Gold mining stocks have been beaten flat in recent months; the action in gasoline is saying it might be time to give them another look.

Now for the Good News

U.S. crude imports have fallen 5.9% so far this year, extending a 21% decline last year, The U.S. met 84% of its energy needs in the first 10 months of 2012, on pace to reach the highest annual rate of self-sufficiency since 1991.

And our per-capita oil use is dropping like a rock  …

Source: EIA, FRED, Business Insider

You can see our use of imported oil is falling quickly. Part of this is efficiency gains and part is because America’s aging population is driving less.

In fact, Citigroup recently released a report saying that the U.S. could become energy-independent — or at least dependent only on our neighbor Canada —  much more quickly than anyone realizes. Citigroup believes that could happen in the next five years.

Sure enough, Canadian oil accounted for less than 16% of all U.S. imports in 2002. It’s growing so rapidly, Canadian oil now accounts for 28%. Canada’s share of our oil supply is only going to grow as more cross-border pipelines are built.

Canadian oil sells at an even-bigger discount to Brent than U.S. oil. The more energy-independent we become, the more likely that our gasoline prices will start to move with domestic oil prices —  and that would be a huge economic boost for U.S. consumers.

How You Can Play Oil and Gasoline Prices

There are funds that let you play the price of oil and gasoline. Some examples  …

United States Oil Fund (NYSEARCA:USO): This is a limited partnership, not a true ETF. It’s very liquid (has a lot of trading volume), which is always important in a fund. While it does track the price of the U.S. oil benchmark, it notoriously underperforms it.

United States Brent Oil Fund (NYSEARCA:BNO): Another limited partnership, this one focuses on the price of Brent crude. It’s not as liquid as the USO.

United States Gasoline Fund (NYSEARCA:UGA): This fund tracks RBOB gasoline prices and has decent volume.

ProShares Ultra DJ-UBS Crude Oil Fund (NYSEARCA:UCO): This is a leveraged fund, tracking twice the daily movement in crude oil. You can use this to bet on oil, but you better be right, because being wrong is oh-so-painful.

Also consider funds that hold baskets of oil company stocks —  the Energy Select Sector SPDR (NYSEARCA:XLE), the iShares Dow Jones U.S. Oil Equipment Index (NYSEARCA:IEZ) and the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP).

Or maybe you’d like to find out about the kind of energy stocks and funds I’m recommending to my Global Resource Hunter subscribers. Many profit opportunities are hidden in global trends and even threats, and I just gave them a specific way to play it in the newest issue that just went out on Friday.

In fact, we took four rounds of gains last week —  and there’s a lot more where that came from. Plus, I’ll be firing off some new picks soon. Click here now to get on board and be among the first to receive my recommendations when they arrive!

If you’re doing this on your own, be careful, and do your own due diligence.

Yours for trading profits,

Sean BrodrickWritten By Sean Brodrick From Money And Markets

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss  along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and  Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff  do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not  guaranteed. Performance returns cited are derived from our best  estimates but must be considered hypothetical in as much as we do not  track the actual prices investors pay or receive. Regular contributors  and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene  Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam  Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle  Zausnig.

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