Use Oil Stocks As A Hedge Against Rising Gas Prices
By David Dierking
The numbers at the pump never seem to stop going up lately.
After bottoming out at around a national average of $1.62 per gallon back around Christmas of 2008 thanks to the implosion in the financial sector, gas prices have resumed their slow steady northward march and are currently back above $4.00. Plus, we’re coming into the summer travel season where seasonal travel and demand for gasoline tend to increase so don’t expect a reprieve from $4 a gallon gas any time soon.
That doesn’t mean that there may not be something you can do to help ease the burden a bit though.
Prices at the pump are a direct reflection of current crude oil prices. If you want to hedge your exposure to a rise in gas prices, why not own the underlying asset that causes gas prices to rise? No, I’m not talking about storing up a thousand barrels of crude oil in your basement. I’m talking about adding some oil stocks to your portfolio.
Now, the price of oil stocks will not move in direct correlation with oil prices (there are many other factors that go into a stock’s price) but adding exposure to oil stocks will be a lot easier, less costly and less risky than delving into the highly volatile world of oil futures contracts.
There’s no denying the fact that oil companies profit big time from rises in oil prices. ExxonMobil – the biggest oil company out there as well as the biggest company out there period with a market cap of around $400 billion – earned around $35 billion in the last 12 months. While all that cash doesn’t necessarily mean a straight line up for the stock price there has been shown to be some high level correlation between the stock’s price and the price of oil. If gas prices go up, wouldn’t it be nice to own an investment that has a good chance of appreciating in value at the same time?
But what’s the proper way to make a play? You have a few different choices depending on how easy you want it to be and how risky you’re willing to be.
If you want a low cost, broadly diversified investment option, an oil ETF should be your first choice (see how to buy ETFs and trade ETFs for free for more discussions on how to invest in ETFs). These will invest in a wide array of oil producers, manufacturers and explorers and will do so at a cost that won’t dent your pocketbook. The SPDR S&P Oil & Gas Exploration & Production ETF might be one you’d want to consider if you choose to go this route.
You can go for individual stocks too. These carry some higher risks because you’re investing in single securities but the benefits can be the same. ExxonMobil is the alpha dog in this sector (you can buy ExxonMobil (XOM) through ComputerShares without commission). BP was another large company here but the Gulf oil spill put its future in question. Others to consider would be stocks like Chevron and Sunoco.
Buying oil futures is not for the faint of heart. Yes, it’s more of a pure play against oil prices but not knowing what you’re doing can lose you a lot of money in a very short period of time. This may be an option best left to the experts.
Try out the oil stock hedge and you may find yourself sweating the price of gas a little less this summer.
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