Pledge To Hedge: Three Ways To Lock In Low Gas Prices Right Now
By Keith FitzGerald
Investment Director
Money Morning/The Money Map Report
Many of my neighbors here in Oregon are enjoying the big decline in gasoline prices particularly those who still own SUVs pickup trucks or any of the other firebreathing pistonclanking monstrosities Ive seen on the road recently.
And no wonder. Gasoline prices in our neck of the woods have fallen between 60 and 70 since July when oil closed at a peak price of 145.29 a barrel. Here in Oregon that means that my wife and I dont feel like weve been mugged every time we fill up.
But what happens when the prices start going up again? Global demand for oil will fall this year for the first time since 1983 as the world financial crisis saps demand the International Energy Agency said a week ago. That has some people believing that prices will remain low.
But I wouldnt bet on it at least not for long.
The Organization of Petroleum Exporting Countries OPEC is making loud noises that it wants to see 75 a barrel again soon which would represent a 70 increase from the 43.60 a barrel where oil closed yesterday Tuesday. OPEC supplier of more than 40 of the worlds oil is ready to make a big cut in supplies when it meets in Oran Algeria today Wednesday Venezuelan Oil Minister Rafael Ramirez told journalists.
How much of a production cut well see is anybodys guess depending on who does the cutting and who actually abides by the agreement over time. But well know very shortly.
Russia recently announced after years of going it alone that it wants to actually join OPEC. Now OPEC has asked Russia to cut oil output by between 200000 and 300000 barrels a day to help revive prices OAO Lukoil Chief Executive Officer Vagit Alekperov said in Moscow on Monday. And Russia may well do just that.
A price of 60 to 80 a barrel would be consistent with a global production cut of about 2.5 million barrels and thats a figure apparently supported by OPEC representatives we spoke to. Leonid Fedun OAO Lukoils deputy chief executive officer noted in a recent Bloomberg News report that there is a consensus among members to reduce production.
This highlights something thats often missed in the Western media where the price of oil is typically associated with the price of gasoline and how that price impacts driving habits. According to CNN MSNBC and a whole host of others evidently thats what matters to us.
But in OPECproducing countries its a different story. There the price of oil is more typically associated with external trade relationships and hard currency requirements that are policy level decisions often made at the expense of individual concerns. And I dont have to remind you that most OPEC member countries dont exactly specialize in freedom of choice so the odds are high that what the energy ministers want the energy ministers will get but thats a story for another time.
Heres one other point to consider: With all the medias focus on OPEC theres been little mention of China India and the whole host of emerging markets that are still experiencing doubledigit growth in oil demand. Thats not going away.
The bottom line here is that it would behoove interested investors and people who like to drive less fuel efficient cars to hedge any potential future rise in gasoline prices sooner rather than later. Heres one quick and dirty way to do it.
If you drive 20000 miles a year and your car gets 30 miles to the gallon at a time when fuel costs 1.75 a gallon you are looking at an annual fuel bill of 1166.67. If OPEC gets its wish and oil rises by 70 gas prices may rise in tandem. Therefore buying the equivalent share value of your projected annual fuel expenditure in such exchangetraded funds ETFs as the United States Oil Fund LP USO the iPath Samp;P GSCI Crude Oil Total Return Fund OIL or the United States Gasoline Fund LP UGA could be just the ticket.
As prices rise so too will the value of your investments. If prices fall further youll obviously lose money but youll be paying less at the pump at the same time.
Granted what I am proposing is not a perfect hedge. Among other things there are potential capital gains to contend with when you sell 12 months from now taxes transaction costs and a whole host of other variables that could come into play. At the same time you could simply alter your driving habits which of course would change the value of your calculations midstream.
None of that really is material though. Hedges are never perfect.
But they do offer you a chance of being in the neighborhood when it comes to protecting your wallet from what could be vastly higher oil prices to come.
Editor’s Note: Money Morning Investment Director Keith FitzGerald is on a mission to reduce his household energy consumption by 25 through conservation without altering or compromising his family’s lifestyle. This is the seventh installment in a periodic series in which he updates us on his progress.
To read more click here
About the writer: Keith FitzGerald is a Contributing Editor to Money Morning as well as Investment Director of the Money Map Report and editor of the New China Trader. He is also a seasoned market analyst known for his accuracy perspective and insight. He is also a former professional trader. and licensed CTA advising institutions and qualified indivi
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