Energy Trading And Hedging With ETFs USO, UNG, UGA And UHN

 |  Includes: UGA, UHN, UNG, USO
by: Jerry R. Carter

Last week the energy complex was assisted by positive news regarding the European debt crisis meltdown. This week will show continued focus on the European bank stability and bond markets. Oil will continue to be used as a substitute or reserve currency for funds and investors.

December is a busy month for end-used energy hedging and investments. There are a couple of ways to do this successfully in the stock market and several ways to conduct retail hedging opportunities in the futures markets.

Focusing on the stock market today, the symbols for the trading vehicles are (UGA) United States Gasoline Fund, (USO) United States Oil, (UNG) United States Natural Gas Fund and the (UHN) United States Heating Oil Fund. Commodities and futures generally are volatile and are not suitable for all investors. The UGA, USO, UNG and UHN are speculative and involve a high degree of risk. An investor may lose all or substantially all of an investment in UGA, USO, UNG and UHN. Funds that focus on a single sector generally experience greater volatility. Investors may conduct these processes by speculation of purchasing and selling by replacing the hedging reccomendations with speculation.

General hedging for end-users can be calculated by determining the amount of the commodity used and dividing by the current market price of the trading vehicle to determine the annual exposure at either the start or end of the hedging cycle. Hedgers in the middle of a purchase or sale may opt for catch-up transactions. These compilations for monthly hedging are generally computed by using historical pricing levels for the physical commodities. This is detailed data from the Energy Information Agency and is strictly seasonally adjusted and fundamental pricing data. No technical data is used in the calculations. Detailed records of spot commodities are more available for certain commodities than others. All of the four major energy commodities are broken down into 5-6 month purchase and 5-6 month sale hedges. Hedging is a viable risk management strategy and can be used by end-users successfully. If the direct commodity is not available to hedge for the end-user, a cross hedging strategy may be created.

Crude oil has been trading erratically and will continue to over the foreseeable future. Hedging crude oil can be important for many input costs and end-user experiences over the course of the year. The crude oil contract is represented by the USO trading symbol on the stock market. This week in December has no activity, but a purchase hedge is currently on for 18% of usage. A second purchase hedge is expected yet in December.

RBOB, gasoline, is represented by the UGA trading symbol on the stock market. Currently from December 4-14th the first yearly hedge is forecasted to be purchase at approximately 20% usage.

Natural Gas is represented by the UNG trading symbol and no action is required during this week of December. Currently 19% of the natural gas hedges remain on the sale side. Purchase hedges are not expected to resume until next March.

Heating Oil is represented by the UHN trading symbol and is entering its first contract action this week. December 4-14th represent the purchase hedge of the first 20% of usage for the end user.

Using these energy funds to hedge end-user commodities should not be indicative of current market action. Seasonal hedging is done by disregarding daily price action and headline news. Hedging is seldom used by end-users but is a daily practice by commercial users and often by producers of commodities. Trade with extreme caution and contact a professional broker to assist if unsure of the risks of trading commodities or commodity funds.

Investors must also take into account any tax liability from holding these funds. Contact your tax preparer for more details.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: DavidsCreek, LLC or Jerry R. Carter, does not have a financial interest in any equities, equity options, futures, or futures options recommended or described herein. All employees and agents will not initiate positions until 24 hours after publication before acting on recommendations. All data and statements are reasonably believed to be reliable and accurate; however DavidsCreek, LLC or Jerry R. Carter, does not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice.