What To Expect From Gas Prices This Summer

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 |  About: The United States Gasoline ETF, LP (UGA)
by: David Zanoni

Summary

The situation in Iraq and multiple other factors has led to a rise in gas prices.

Prices are likely to rise further this summer.

The United States Gasoline ETF provides an easy way to trade the gas price fluctuations.

The average retail price of gasoline in the United States has increased from about $3.30 per gallon at the beginning of the year to the current price of $3.68 according to gasbuddy.com. This 11.5% increase has been the result of multiple factors. One factor has been increased demand for fuel in the U.S. As the weather has turned nicer, more travelers are expected to hit the roads which helped to put upward price pressure on gasoline. AAA estimated a 1.5% increase in travelers on Memorial Day weekend this year over last year.

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The typical reason for gasoline prices to increase in the first half of each year is due to the switchover from a winter blend to a summer blend, which lessens emissions. The switchover takes place at refineries during March and April. The summer blend is more expensive to produce, thus contributing to a typical rise in prices in the first half of the year.

Refineries also perform maintenance at their facilities during the first quarter of each year when demand for gasoline is at the lowest level. These periodic shutdowns of certain refineries cause a disruption in the total supply, thus contributing to gas price increases. This year, some Gulf coast refineries performed extensive maintenance, which reduced the overall U.S. gasoline supply and helped contribute to the rise in gas prices.

The situation in Iraq has created a fear that oil supplies could be disrupted, which put further pressure on prices recently. The price of gasoline is about 10 cents higher per gallon this year over last year. That increase is likely the 'Iraq fear premium' because the country is OPEC's second largest exporter. Although the oil supplies from Iraq have not been disrupted, having a possibility of a disruption typically causes oil futures to trade higher, which leads to higher gasoline prices.

Higher Prices this Summer

Tom Kloza of the Oil Price Information Service thinks that the price of gasoline will rise further to about $3.79 per gallon, but not to $3.90 as it did in 2011 or 2012. I think that Mr. Kloza could be correct if the supply in Iraq remains uninterrupted. The reason that I agree with Kloza is because the EIA.gov expects the price of gasoline to fall to average $3.54 per gallon in September. Since the price of gasoline typically peaks around Memorial Day and falls into the second half of the year, I think that prices will decline after the situation in Iraq fades.

What Investors Can Do

Investors can buy the United States Gasoline ETF (NYSEARCA:UGA) to hedge the rising price of gasoline. The price of the ETF typically rises and falls along with the price of gasoline. So, investors could try to capture the remaining price increases this summer by purchasing UGA. However, I think that most of the increases including the situation in Iraq has already been priced in. Since the price of gasoline may only rise another 10 cents per gallon this year, I think that there is a better opportunity to capture the downward price action into the end of the year. You could short the UGA, but since the ETF has options available, purchasing a put allows investors to define the downside of the trade. The price of the UGA was $57.90 on April 1, 2014. The price of gasoline at the time was $3.54, which is where the EIA.gov is expecting the price to fall by September. If the price of gas does drop to $3.54, we could see approximately $6 decrease in the price of UGA.

For the trade, look at purchasing the October 2014 $60 put. This will allow for a little margin of error instead of buying the $57 put. The maximum loss is the price you paid for the options, but that is less risky than subjecting yourself to unlimited losses with a naked short position. If UGA falls under $60, traders have the potential to double their investment. With a delta of -0.22, the $0.78 option price will increase by $0.22 for every dollar decrease in UGA's price. For every dollar increase in UGA's price, the put option will decrease by $0.22. Investors may want to wait until the price of gasoline peaks. Perhaps wait until the price of gasoline begins to fall again to enter the trade.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.