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How Much Higher Can/Will Gasoline Prices Go?

Thus far this year, during the first two months of 2012, according to Bloomberg, we have witnessed an 18% increase in the price of crude oil based on the ICE Brent Crude Oil Active Month Index and a 16% increase in the price of gasoline based on the Nymex Gasoline Active Month Index. With respect to the latter, with gasoline prices now averaging $3.74 per gallon for regular grade gasoline across the United States and some experts calling for prices to exceed the peak observed in July of 2008, many are now wondering how high gasoline prices will go (especially during the upcoming summer driving season) and what can be down to counteract these rising prices.

Time Period

National Average Price for a Gallon of Regular Gasoline

Current Average

$3.738

Week Ago Average

$3.612

Month Ago Average

$3.443

Year Ago Average

$3.387

Highest Recorded Average Price (7/17/08)

$4.114

Source: AAA Fuel Gauge Report, March 1, 2012

From our perspective at Hennion & Walsh, retail gasoline prices are a factor of worldwide demand for crude oil (which is refined into gasoline), worldwide supply of crude oil and the market's perception of geopolitical events (Ex. Reports of Saudi pipeline explosions) that could impact the demand or supply of crude oil. At present, the supply side of the equation is being impacted by fears that Iran may cut back as a supplier of crude oil due to ongoing tensions with Israel and the West. On the demand side, as the U.S. and global economic recoveries continue to inch along, the demand for crude oil, and by extension gasoline, has also increased in many different areas of the world - led primarily by China.

As I have often stated before, market perception and market reality are often two entirely different things. For example, as oil prices rally, traders believe that retail gas prices will eventually follow suit. Given the nature of the futures markets and the need for many industrial companies to lock-in intermediate-long term fuel costs, this type of market perception can play a great role in current prices based on the speculation regarding future prices. With this said, investors should appreciate that there is generally a lag time associated between increasing oil prices, the process of refining crude oil into gasoline and its delivery to stations across the country.

One way to address the increasing cost of oil, and gasoline, is to tap into the nation's strategic petroleum reserve (NYSE:SPR). However, this is an option, in my opinion, that should be considered as a last resort as the reserve can provide some protection in the event of a worldwide catastrophic event and affords us some level of energy independence from some of the larger, oil producing countries. Other counteracting options could include the continued exploration for alternative sources of energy or researching of ways to reduce our reliance on crude oil. Neither of these potential solutions, however, is likely to occur, in a significant fashion, in the short term so oil (and gas prices) will continue to be driven by worldwide supply and demand pressures for the much desired commodity for years to come.

From an investment perspective, this equation can make energy oriented commodity investments such as Exchange Traded Products (ETPs) worthy of consideration for most growth investment strategies. Some energy oriented ETPs currently on the market include the following:

ETP Ticker

ETP Name

USO

United States Oil Fund, LP

UNG

United States Natural Gas Fund, LP

DBO

PowerShares DB Oil Fund

OIL

iPath Exchange Traded Notes S&P GSCI Crude Oil Total Return Index Medium-Term Notes Series A

DBE

PowerShares DB Energy Fund

USL

United States 12 Month Oil Fund, LP

UGA

United States Gasoline Fund, LP

RJN

Elements Exchange Traded Notes Rogers International Commodity Index - Energy Total Return

BNO

United States Brent Oil Fund

GAZ

Dow Jones-UBS Natural Gas Sub-index Total Return

UNL

United States 12 Month Natural Gas Fund

JJE

iPath Exchange Traded Notes Dow Jones - AIG Energy Total Return Sub-Index ETN Series A

OLO

PowerShares DB Crude Oil Long ETN

GASZ

ETRACS Natural Gas Futures Contango ETN

UHN

United States Heating Oil Fund

OILZ

ETRACS Oil Futures Contango ETN

CRUD

The Teucrium WTI Crude Oil Fund

UBN

UBS E-TRACS CMCI Energy Total Return ETN

FUE

ELEMENTS Exchange Traded Notes MLCX Biofuels Index (Exchange Series)-Total Return

OLEM

iPath Pure Beta Crude Oil

DCNG

iPath Seasonal Natural Gas

ONG

iPath Pure Beta Energy

NAGS

Teucrium Natural Gas Fund

TWTI

RBS Oil Trendpilot Exchange Traded Notes

USO

United States Oil Fund, LP

UNG

United States Natural Gas Fund, LP

DBO

PowerShares DB Oil Fund

Source: ETF Database, March 1, 2012.

Please note: Investors should conduct their own due diligence before considering an investment in these exchange traded products (ETPs). Hennion & Walsh Asset Management currently does not have any direct investments in any of the ETPs listed above as of March 1, 2012.

Another positive factor that could lead to pressure to reduce gasoline prices this year is that 2012 coincides with a presidential election year. Certainly high gas prices are not favorable to the incumbent administration as they can hinder economic growth and aggravate the voting populace based upon the direct impact of increased fuel costs on their day-to-day lives of most Americans. As a result, President Obama recently announced/reiterated his energy policies, which focus on increased levels of U.S. production and further promotion of alternative energy research. Whether these policies are adopted or successful remain to be seen.

Incidentally, if you are wondering which states have the highest and lowest gasoline prices, according again to the 3/1/12 AAA Fuel Gauge Report, California has the highest average price at $4.334 per gallon of regular grade gasoline while Wyoming has the lowest average price at $3.174 per gallon of regular grade gasoline.

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