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Hedging fuel price increases
Old 12-01-2008, 07:37 AM   #1
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Hedging fuel price increases

Although energy prices have declined dramatically in the past few months, the pain at the pump I suffered when gas was $4 a gallon is still fresh in my memory. Even more vivid is the near coronary from the $5 a gallon I payed for diesel last August, which took a lot of the pleasure out of our summer motor home vacation.

Ive been looking at buying some United States Oil (USO), an oil ETF, in an attempt to hedge against the possibility of another huge run up in oil prices. Im not talking about a huge investment, maybe something in the range of 2-3% of my portfolio enough to feel like Im at least partially insuring against another big hit. I know I have energy stocks in the Wellesley, Wellington funds I own, but the impact of increases in energy prices gets easily diluted by other market movements. Plus, I want to be able to harvest some of the gains to help pay for increased fuel costs and I do not want to sell my core funds for this purpose.

What am I missing in my thinking? Are there better funds available other than USO? Better ways to hedge other than the obvious (selling the motor home and backpacking )?
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Old 12-01-2008, 08:02 AM   #2
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you can check if there is a pre-paid gasoline plan somewhere. i've read that some gas station did this and some people pre-pad for gas back in 2000 for something like 10 years
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Old 12-01-2008, 08:34 AM   #3
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I've been looking at UGA , an ETF which tracks gasoline prices.
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Old 12-01-2008, 08:43 AM   #4
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Gas prices are bound to fluctuate - - but the recent drop in gas prices is hard to explain! Last summer I paid $4.29/gallon in New Orleans. Now, it is so much lower. Still, gas prices in Louisiana are maybe 20 cents higher than they were at most gas stations in Springfield, Missouri on November 23rd, shown here:



I am posting this for the purposes of future nostalgia..

Thanks to the low gas prices, we stayed an extra day.

I have nothing to contribute on how to hedge gas price increases, but just couldn't resist posting this photo.
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Old 12-01-2008, 08:50 AM   #5
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One problem with commodity ETFs is taxes. For more details you can google "commodity ETF taxes". ETNs are supposed to be an alternative that might get better tax treatment but I don't know if that has been settled in court.

Maybe you can get the same hedging benefit along with better tax treatment from an energy exploration, infrastructure, production or services ETF. You can find a list of these ETFs at The Complete List of Commodity ETFs and ETNs - Seeking Alpha
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Old 12-01-2008, 08:50 AM   #6
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Yeah -- buying USO. Been there, done that, took a nice haircut for the team...
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Old 12-01-2008, 09:04 AM   #7
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FIRE'd, I looked at UGA but I'm a little concerned about the lack of track record since the fund is less than a year old.

Az, the commodity ETF would be held as part of my my IRA account so I shouldn't have to worry about tax treatment, correct? Or am I missing something else?

Zig, I'm thinking about picking up where you left off. What could go wrong, eh?
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Old 12-01-2008, 09:06 AM   #8
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Quote:
Originally Posted by REWahoo View Post
I’m not talking about a huge investment, maybe something in the range of 2-3% of my portfolio – enough to feel like I’m at least partially insuring against another big hit. I know I have energy stocks in the Wellesley, Wellington funds I own, but the impact of increases in energy prices gets easily diluted by other market movements. Plus, I want to be able to harvest some of the gains to help pay for increased fuel costs and I do not want to sell my core funds for this purpose.
I don't know anything about gas prices or driving long distances, but is there a different perpective? I know the prices jumps were impressive in both percentage and $$/gallon terms, but how much higher were the total expenses? $500? $1000? How much per year would you expect to have to raise your fuel/travel/entertainment budget?

If you were trying to totally offset the higher costs, then you'd want to determine how much USO (or whichever ETF) you'd have to buy to cover the after-tax difference in fuel costs, assuming that its share price rises directly in proportion to gasoline prices. I wonder how much of a portfolio % that'd work out to be.

Then if oil hits $150/barrel again, would you yell "Yee-haw!", tank up the Class "A", and hit the road knowing that your trip was paid for by your profits? When would you sell the shares?

If oil stays below $60/barrel or if you lose money on USO, would you stay home?

I hesitate to apply an analogy to this thinking, but it seems like buying stock in restaurants or grocery stores or retailers or RV manufacturers to offset lifestyle/entertainment expenses. We buy a pizza at Costco every week and have probably spent over $3000 in that pursuit over the last five years, making us hostages to the mozzarella futures market, but we don't own stock in the store...
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Old 12-01-2008, 09:08 AM   #9
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- - but the recent drop in gas prices is hard to explain!
.
Gasoline prices have pretty much tracked oil prices downward.

A barrel of oil has dropped from a peak of $147 to about $52 currently - a drop of $95. A barrel of oil is 42 gallons. So a "back of the envelope" calculation suggests each $1 drop in the price of oil, would lead to a 2.4 cent drop in the price of a gallon of gasoline. 95 x 0.024 = $2.28 reduction in gas prices, which pretty much puts us where we are today.
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Old 12-01-2008, 09:28 AM   #10
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Originally Posted by REWahoo View Post
FIRE'd, I looked at UGA but I'm a little concerned about the lack of track record since the fund is less than a year old.

Az, the commodity ETF would be held as part of my my IRA account so I shouldn't have to worry about tax treatment, correct? Or am I missing something else?

Zig, I'm thinking about picking up where you left off. What could go wrong, eh?

You could also buy options on USO. Looks like it would cost you about $8 a share (currently $41) to lock in the current price for 13 months.
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Old 12-01-2008, 09:37 AM   #11
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...assuming that its share price rises directly in proportion to gasoline prices. I wonder how much of a portfolio % that'd work out to be.
If your point is I'm making a mountain out of a mole hill, there is some validity there. However, I feel compelled to mention the discussion we had a while back where you were trying to determine if you could save $1.76 per month on your phone bill by dropping caller ID, or something to that effect.

To your question, I would probably need to purchase an EFT somewhere in the nature of 1 - 1.5% of our portfolio.

Quote:
Originally Posted by Nords View Post

Then if oil hits $150/barrel again, would you yell "Yee-haw!", tank up the Class "A", and hit the road knowing that your trip was paid for by your profits? When would you sell the shares?
My thinking is to sell enough shares to cover the delta between the cost of diesel at the time I bought the EFT and the cost when we hit the road.

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If oil stays below $60/barrel or if you lose money on USO, would you stay home?
No, I'd be happy that my day-to-day costs for gas to drive the cars plus the cost of diesel was affordable. Maybe no "Yee-hawing" when we hit the road in the motor home, but no trip cancellations either.

Quote:
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We buy a pizza at Costco every week and have probably spent over $3000 in that pursuit over the last five years, making us hostages to the mozzarella futures market, but we don't own stock in the store...
What? I thought you had a big slice of cheese futures? Oh, I guess that wasn't mozzarella, it was beever cheeze. And maybe I'm confusing you with CFB...
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Old 12-01-2008, 10:10 AM   #12
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If your point is I'm making a mountain out of a mole hill, there is some validity there. However, I feel compelled to mention the discussion we had a while back where you were trying to determine if you could save $1.76 per month on your phone bill by dropping caller ID, or something to that effect.
Guilty. But that's why I raised the issues-- we have this discussion all the time at Hale Nords when these lifestyle-arbitrage "opportunities" present themselves. And then usually we stick with the same asset allocation, no matter how much of its products we happen to be consuming that quarter or how underpriced Apple that stock may look.

An option contract sounds like a great hedging technique, though.

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And maybe I'm confusing you with CFB...
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Old 12-01-2008, 10:13 AM   #13
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An option contract sounds like a great hedging technique, though.
I was thinking that too, but they are pretty costly right now, even for somewhat out of the money calls -- especially if you go out several months or longer. The option contract costs seem to indicate a lot of other traders also want to "lock in" oil at these prices.
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Old 12-01-2008, 09:24 PM   #14
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Someone suggested UGA when I recently started a thread "Gasoline Futures, Anyone?" I've not used ETF's in my IRA, so I'm hesitant to do so. Especially one that's so new. Can you educate me about the possible pitfalls?
Also, FIRE'd@51 mentioned simply tracking oil prices would have a similar effect. Are there ETF's or similar instruments that track oil?
Buying stock in an oil company might work, but I'm worried that the new crowd in Washington may be pretty tough on them; we could have oil going up but profits and stock prices going down.
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Old 12-01-2008, 09:27 PM   #15
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Are there ETF's or similar instruments that track oil?
United States Oil (USO)
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Old 12-01-2008, 11:11 PM   #16
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In 2004-2005, I bought oil equipment companies and oil drillers, sprinkling among a dozen companies in this sector. It more than hedged against the rise in price of gasoline. In fact, it nullified my sin of being tech stock laden in 1999-2001, and helped me climb out of the hole.

I also bought OIH. Not knowing where the top was, I only set trailing stop loss orders on them, and was able to get out later with some profits. I will buy again, perhaps next year.

Never bought USO, which came out later than OIH.
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Old 12-02-2008, 04:04 AM   #17
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Oil company stocks or ETFs will probably track...

Probably your best long-term hedge is to lower your consumption... buy a fuel efficient vehicle the next time you purchase one. Then you save both ways... when prices are low you save, when the rise you save.

For RVs... you will have to pay the toll. The cost of that activity has probably increased for good... you have a temporary reprieve. Enjoy it.
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Old 12-02-2008, 10:49 AM   #18
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I'm thinking that the new crowd in Washington will be pretty tough on oil companies, especially if prices start to rise. Therefore, buying stocks in the companies or related businesses may not work as well as it did in the past. What do you think?
EDITED TO ADD:
A Google search for USO ETF produced some uncomplimentary articles including ones by MarketWatch and LakeView Asset Management. I'm not educated enough to understand it all, but I get the impression that the structure of the fund causes it to increase or decrease somewhat more than the actual price of oil. Please check for yourself and let us know what you think.
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