Here's a summary of the points we made and wanted to get to this morning on the Stuart Varney Show on Fox Business News. We'll post the video of the interview as well.
Stuart asked, why isnt the market getting hit with Gas prices rising?
Point #1: Expect the price of gasoline to average $3.55 for 2012 and go up to the $4 mark and possibly $4.50 in major metros.
Its worth noting that when gas breaks up through the $3.50 mark it holds it for an extended period of time. We saw this in 2008 and 2011.
Both of those years the price of gas tested the $4 mark, but declines soon followed showing that $4 has been the upper limit in recent history.
Point #2: Supply concerns will drive prices up
In the short term, price elevation is due to 2 reasons:
1. a sooner conversion to the summer blend than usual
2. Supply concerns from aging refineries going offline due to unplanned maintenance of the facilities
Point #3: Demand will keep supply in check
However, lower demand will offset these factors over a longer period. The US consumption of gasoline has been tracking downward and is expected to continue through 2013.
Demand has been weakening for 3 reasons:
1. Slower growing population of able drivers
2. More fuel efficient cars
3. Growth in use of reusable fuels like bio fuel and ethanol
Point #4: Impact to the economy could be close to $100 billion
It is estimated by experts that the rise in gas prices in 2011 drained about $100 billion out of the economy.
However, due to the trend of lower driving miles, expect that figure to be lower this year. Of course it all depends on how long it stays above $3.50 / gal.
Call to Action: Invest in the SPDR ETF for Oil and Gas production (XOP) over the next 3 months. This ETF has almost $1B in assets and will give exposure to the refiners with a very liquid options market to create your hedges.
Disclosure: We have clients with a position in XOP since October, 2011.
Gas Price Conversation on Fox Business News
by Jay Pestrichelli on February 17th, 2012
Posted in ETF Hedges, Stocks Tagged with no tags
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