Some possible relief for gas pump pain

Posted on: May 12, 2011 in: Commodities, Energy with 0 comments

United States Gasoline Fund LP ( Ticker: UGA )

I visited my local Shell station today and left $100 poorer. As I drove off, I thought of all the ways I could ease the pain. Get a smaller car. Move closer to work. Take transit. Work from home. All good. But then, inspiration struck. Buy UGA!

UGA is the US Gasoline Fund LP, an ETF that moves nearly in tandem with retail gasoline prices, as the chart below shows. Drivers concerned that gasoline prices will keep rising could buy UGA. They could potentially lock in gasoline prices at current levels. That way, what Shell takes away, UGA could give back. Of course, the reverse will also apply if gasoline prices fall.

The relationship between UGA and retail gasoline prices is not perfect, however. The biggest source of friction comes from UGA’s structure. Rather than lugging jerry cans into the office (fire hazard, you know), UGA’s manager uses the one-month futures contracts on gasoline. Gasoline futures are generally “in contango”, where the contract expiring this month costs less than the one expiring next month, etc. This is due to storage and interest costs. Every month, UGA “rolls” its futures, selling those about to expire at a low price and buying the next month’s at a higher price.

As it happens, because of the floods threatening US refineries along the Mississippi, right now gasoline futures are actually “backwardated”, the opposite of contango. That’s an indication that prices should fall from these peaks. In fact, crude oil prices have fallen about $8 as I write this.

But normally, contango prevails and takes a cut of UGA’s returns. Over the last three years, while retail gasoline prices are up 25%, UGA is up about 4%. Part of that difference is due to contango. Part is due to location: The futures are for delivery to New York Harbor.

Generally, UGA is best held for shorter periods to make directional bets (that’s why we don’t buy it). For example, since the start of the current rally in gas prices last August, UGA is up 56% in C$ terms, versus 31% for Canadian gasoline. However consistently calling short-term direction is really tough (as some hedge funds recently discovered) and definitely a lot tougher than buying a Prius.

archerETF Metrix UGA
Category Commodities
Benchmark NY Gasoline
Total Holdings NA
52 Week High $55.74
Recent Price $54.95
52 Week Low $30.36
Avg Daily Volume 0.14 Million Shrs
Avg Daily Volume ($) $7.69 Million
Total Market Cap $156.36 Million
ETF Annual Fee 0.90%
ETF Trading Currency USD
ETF FX Exposure USD
Annual Volatility Not Available
Correlation to S&P 500 45.4%
Return to Risk Ratio Not Available
Use of Leverage No
Use of Futures Yes
6 month Return 57.13%
1 Year Return 53.06%
2 Year Return 95.34%
3 Year Return -7.38%
Dividend Yield (TTM) 0.00%

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archerETF offers Global Tactical Portfolio Management.

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© 2011 archerETF Portfolio Management is a division of Bellwether Investment Management, a discretionary portfolio manager registered with the Ontario Securities Commission. This report is provided for information only and does not constitute investment advice. While we believe the information to be accurate and timely, we make no claim or warranty to that effect. Please seek professional advice before making any investment decision. We may hold positions in any or all securities discussed in this report.

 

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