Hedge Your Fuel Costs Like the Big Boys

I have previously written about my theory that oil prices will continue to rise off these prices, and last week with the trouble in Gaza, crude prices surged to over $46 a barrel.  You might have noticed this if you went and filled up your gas tank this weekend, seeing prices at the pump go up 10 cents a gallon at most places.

If you believe like I do that crude oil prices will continue to rise throughout the next year, there is a way to hedge these lower prices just like Southwest Airlines has successfully done over the last few years.  There is an Exchange Traded Fund (ETF) that tracks crude oil prices, and if you are not familiar with ETF’s, they trade just like stocks, well, because they are a stock.

Here is what I have done, I figured out how many gallons of gasoline I use a month (OK, so I’m one of the lucky ones.  My wife and I both have company cars and we don’t actually pay for our fuel in those, but I have a boat that has a 175 gallon tank that I fill up multiple times a year.  Try that a few times with “lake gas” at $5 a gallon and you get the idea why I did this.)  For this example I am using 160 gallons a month (about the national average if you have 2.3 kids), I am also figuring the Texas Retail Price for gasoline as of today of $1.50/gallon.

At 160 gallons a month at $1.50 per gallon that figures out to be in round figures $2,900 for the average family for a years worth of gasoline at today’s prices.  So, what do you do?  You go to your brokerage account and you buy $2,900 worth of USO, then every month you sell 1/12th of your holdings to pay for that months gas.  If gasoline goes up, so should USO and that increase should cover the difference in what you are paying at the pump.  Beware, you will have short term capitol gains tax consequences and brokerage fees to account for, an could increase your holdings in USO to help hedge some of that,  but if oil does go to $100 a barrel again, I think the last thing you will be worried about is paying $6 a month brokerage fees.  Also beware, oil could go lower.  It wasn’t that many years ago that crude was trading for $10 a barrel, and we could very likely be headed in that direction again. If that is the case, you could actually lose money, possibly your whole investment if USO goes to zero as the ETF doesn’t track oil dollar for dollar.  There is also some risk of time erosion with USO as there is a contango in the oil market right now.

Would I put this trade on Monday morning?  Probably not.  I would wait a few days to see if oil prices pulled back from these numbers and then put my position on.  I currently own USO and am short PUTS in USO over multiple strikes and months.  I am a firm believer that oil prices will rise from this level, but I am also just a normal every day guy, not an expert by any means.

You can also use this stategy to hedge Natural Gas (UNG), and in Texas since the spot price for electricity is based on natural gas prices, there may be a formula to hedge your electrical use using UNG as well.  But with the option to lock in prices with the electrical companies themselves (who are hedging their coal and natural gas), I found it easier to lock my electrical rates in for a year at 12.1 cents/KWH.  You can check your offers by going to Power to Choose.

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