Posted on 03/06/2012
Today we want to look at an interesting and effective way that would help investors handle the recent spike in one commodity, which affects almost every consumer, Gasoline. Since the market bottom on October 4th, we've seen a sharp move higher in Gasoline prices, affecting anyone who drives a car or buys produce at the super market. Gasoline has rallied nearly 33.06%, nearly five times that of the Continuous Commodity Index, and also outpacing Equities. With that said, will gas remain above $3 or even $3.50 for a long time? Who knows, but there is at least a precedent for prices to remain high during prolonged periods of heightened tensions in the Gulf.
With the proliferation of commodity-based ETFs has come the US Gasoline Fund (UGA), which tracks the futures market for Gasoline. The spike in Gas prices and availability of Gasoline-tracking funds has prompted some people to look at a "gas hedging" approach. We were reminded of a link a client of ours sent us a while back that we'll pass along, www.dqydj.net has a "How to Hedge Your Gas?" that has calculator that employs shares of UGA. That site could make your efforts a bit more scalable, but the math is hardly onerous on its own. Naturally the price you pay at the pump on your block has a few added variables above and beyond the price of Gasoline futures (state gas taxes, local competition/markup, etc.), but assuming all else is equal shares of UGA could be used as a hedge against your gasoline price risk.
Again, there is no advanced calculus required in determining the exposure in UGA needed to effectively put a "locking gas cap" on your gasoline expenses. We'll walk thru it quickly: Let's say you drive 10,000 miles per year and your vehicle gets 15 MPG. If gas prices are $3.59/gallon today (based off EIA's 2/20/12 retail prices) you need a stockpile of $2,000 worth of gas to get you through the next year. Since most red-blooded spouses would frown upon the idea of installing a 666 gallon gas tank in your backyard, shares of UGA are perhaps your best alternative for hedging the risk of further increases in Gasoline. $2400 of UGA would effectively hedge your personal risk, which is about 42 shares of UGA.