By Tom Essaye (Money and Markets | Original Link)
The national average price for a gallon of gasoline has risen nearly 22 cents over the past month. But after listening to many pundits speak on the topic, it’s very clear that very few out there understand why gas prices are rising, and how you can profit from that rise.
To keep it simple, gas prices are rising because oil prices are rising — but not the oil you might think …
Gasoline prices in this country are affected much more by the price of Brent crude — the global benchmark — than West Texas Intermediate (WTI) crude, which is what we produce here in the U.S.
Brent crude prices have risen sharply lately, and now are around $113/barrel compared to WTI crude at $95. So you first have to think about gasoline prices in terms of Brent crude, not WTI. In that light, $3.70+/gallon seems to make a lot more sense given oil is actually at $113 as opposed to the $95 price quoted by much of the media.
I realize that doesn’t make it any easier on the wallet, but it helps give you the proper perspective.
Now here is why most of the gasoline prices in this country are based off of Brent crude …
|Most of the oil shipped into New York Harbor is Brent crude.|
The benchmark for all gasoline prices is set by prices in New York Harbor. And across the country gasoline prices trade either above or below that price based on local supply/demand and taxes.
The gasoline price in New York Harbor is mostly created from Brent crude that is delivered to the Northeast via tankers from the North Sea and down from Canada. So the benchmark is set much higher than it typically would be if the price of gasoline was benchmarked to WTI crude.
Now, this may not seem to make a lot of sense. But it’s important to realize that Brent crude is trading at historical highs versus our WTI crude. And for most of the last 30 years Brent crude has traded at a price lower than WTI crude. So as you can see in the chart below, this is a temporary, but unwelcome, phenomenon.
Why Brent Crude Is
Much Higher Now
It boils down to supply and demand:
First, the international sanctions against Iran, a large exporter of Brent Crude, have helped push prices higher.
Second, many oil rigs in the North Sea, a major Brent crude production area, are undergoing scheduled maintenance, temporarily reducing output. Therefore, the Brent crude market is “tight,” meaning that supply/demand is well balanced at this point.
Over time, as things return to normal, we’ll see a compression of the difference, or spread, between WTI crude oil and Brent crude oil. But it’s not going to happen overnight. And unfortunately we can expect gas prices to stay elevated for the foreseeable future.
As expected, we’ve heard calls to open the Strategic Petroleum Reserve to help lower prices. But that is just a very short-sighted idea, and simply won’t help the problem beyond a few days.
There are some ways, however, for you to potentially profit from this market dynamic …
The large difference between Brent crude and WTI crude is generally positive for the refining sector and refining stocks, as they have healthy margins.
But if you prefer the diversification of exchange traded funds, there are two ETFs that should benefit from continued higher gasoline and heating oil prices:
The United States Gasoline Fund (UGA) looks to profit from the daily changes in the spot price of gasoline.
And the United States Diesel-Heating Oil Fund (UHN) is meant to track movements of heating oil prices.
Being a contrarian investor is more than just looking for beaten down stocks and commodities — it involves learning the true causes of market movements, and looking past the media and pundits shallow explanations to find money-making opportunities.
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