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Discussion Starter #1
Is anyone else thinking of hedging current gasoline prices, locking in current prices? I'm considering pre-buying several years worth of gasoline. I would then sell off UGA as I consume gas at the pump.

The following charts show that UGA (a gasoline ETF) has tracked gas at the pump very well. The top chart is UGA valued in CAD, and the bottom chart is the Gasbuddy 3 year Canadian gas price average.

20172

20173
 

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Jeeze. That is not a half bad idea. I do that with Canadian Tire Gift Cards at the Canadian Tire Gas Stations from time to time when they are on sale or have a large Canadian Tire point/money bonus.

I might seriously consider this.
 

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Discussion Starter #3
Ag Driver, you might want to go to GasBuddy and first pull up a chart of the gas price in your region. I posted the Canadian average, but I wonder if a certain city's gas would track UGA as well.

There's also the issue that UGA has a high fee (0.75% I think) and does not guarantee perfect correlation. So though it would mostly offset the movements of gas at the pump, it's neither a perfect offset, nor "free".
 

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Ag Driver, you might want to go to GasBuddy and first pull up a chart of the gas price in your region. I posted the Canadian average, but I wonder if a certain city's gas would track UGA as well.

There's also the issue that UGA has a high fee (0.75% I think) and does not guarantee perfect correlation. So though it would mostly offset the movements of gas at the pump, it's neither a perfect offset, nor "free".
Ag Driver, you might want to go to GasBuddy and first pull up a chart of the gas price in your region. I posted the Canadian average, but I wonder if a certain city's gas would track UGA as well.

There's also the issue that UGA has a high fee (0.75% I think) and does not guarantee perfect correlation. So though it would mostly offset the movements of gas at the pump, it's neither a perfect offset, nor "free".
 

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I have often wondered why gas stations cannot sell you as much gas as you wish at the then current price and just give you a credit, again in gallons, for use in the future. Hec, I would probably buy $1/2,000. now. Shouldn't pose a problem for the gas company as they could do a hedge. Good thought James
 

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Discussion Starter #6
I have often wondered why gas stations cannot sell you as much gas as you wish at the then current price and just give you a credit, again in gallons, for use in the future. Hec, I would probably buy $1/2,000. now. Shouldn't pose a problem for the gas company as they could do a hedge. Good thought James
That would be interesting, a gas station credit.

I'm curious if anyone sees a problem with the method, buying for example $1000 of UGA. The biggest issue I see is that it's an "imperfect" hedge, and the trading costs.
 

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For only $1000, I don't think I bother with it.
Yeah, that's kind of the problem. Even in peak driving months with road trips, I still only spent around $120/month and my full year expense is maybe $1000.

I suppose I could pre-buy 2 years worth, about $2000. That starts to sound more worthwhile. If gas went up 50%, that's a $1000 win.
 

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It would only make sense to me if I had free ETF trading and UGA qualified. I don't use enough gas, even in my truck, to make this worthwhile, I don't think. With $10 trades, it definitely wouldn't. If I used a lot of fuel in a business -- delivery or taxi or aircraft -- I could picture hedging.
 

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Discussion Starter #10
That makes sense gardner. This could work for someone consuming lots of fuel in a business. But otherwise, with my $10 trades it just isn't worth it.

I bet I'll think differently if gas spikes back up to $1.30 though ;)
 

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The only hedge I can think of is to buy a refiner like Suncor or Valero, who make more money on the refining margin. Those stocks will go up when people start driving again and they can get back to a more normal margin.

People are incredibly irrational over gas prices. For most people, it is not even in their top 5 expenses and sometimes top 10 expenses. And people almost never change their lifestyle when prices go up or to prepare if prices go up: vehicle choices, driving habits, or driving styles, all of which can result in 50-75%+ savings. The amount of complaining is overweight to their own actions and actual economic impact.

Why shouldn't I drive my 3000 kg SUV/truck 140 km/h on the highway and slam the gas at every intersection, those oil companies can suck it, ripping me off.
 

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People are incredibly irrational over gas prices. For most people, it is not even in their top 5 expenses and sometimes top 10 expenses.
That's true. It's amazing how much people complain about gasoline prices when the price at the pump had not even increased in 10 years. And this was before the recent crash.

I always hear people complaining about price fixing and gouging, expensive gasoline. But a price that is flat over 10 years is hardly a problem.
 

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Is anyone else thinking of hedging current gasoline prices, locking in current prices? I'm considering pre-buying several years worth of gasoline. I would then sell off UGA as I consume gas at the pump.

The following charts show that UGA (a gasoline ETF) has tracked gas at the pump very well. The top chart is UGA valued in CAD, and the bottom chart is the Gasbuddy 3 year Canadian gas price average.

View attachment 20172
View attachment 20173
This is actually a great idea. If you're trying to physically own that gasoline as inventory how would you go about storage?
 

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Preselling gas makes little sense. There is the delivery problem, and the storage problem etc.
Futures with a "take possession" take make more sense, but I could imagine at the retail level the gas going negative, which I'm sure would cause some consumer protection and image problems.

I think trading through an abstraction (like an ETF, options etc) makes more sense for hedging.

Personally, my gas is a small expense, I drive a small fuel efficient car. I spend more on fruit than gas, flipp and price matching give me much better ROI.
 

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That's true. It's amazing how much people complain about gasoline prices when the price at the pump had not even increased in 10 years. And this was before the recent crash.

I always hear people complaining about price fixing and gouging, expensive gasoline. But a price that is flat over 10 years is hardly a problem.
Even if that is true, cherry-picking a date like "10 years ago" doesn't tell us whether prices were above or below the rate of inflation at that time, not to mention regional differences in prices. Winnipeg, for example, has low gas prices compared to Vancouver, Montreal or even Toronto.

To use an analogy: if the average house costs one million dollars today, and still costs the same in 10 years, I can't imagine anyone would be calling it affordable (notwithstanding a hyperinflation scenario).

I did check GasBuddy out of curiosity... according to them, the average price in my area (Fraser Valley) was hovering around $1.05/L 10 years ago, and has averaged roughly $1.35/L over the last two years before COVID-19. These are rough figures due to the frequent swings in prices. I'm outside of Metro Vancouver, so add about $0.10/L to those numbers to get Vancouver prices. (Compare the charts for Vancouver, Abbotsford, and Winnipeg or Toronto.)

I think the reason there's so much talk of price-fixing and gouging is the massive swings in prices, and the fact that prices tend to jump quickly in reaction to oil price increases or news events, but then take much longer to fall in response to lower oil prices, and rarely seem to fall as much as they logically should. There have always been swings in prices, but these exaggerated upward swings are a recent phenomena. Prices generally tracked inflation up until the early 2000's. I can't recall exactly when prices became "expensive", but I do remember $0.70/L being considered normal as late as 2004.

When prices remain elevated for long enough, people become conditioned to paying more. Nowadays, anything under $1/L seems "cheap", even though inflation-adjusted prices should probably be closer to .85/L (calculation for my area based on prices pre-2005). We've seen some reasonable prices over the last two months or so, but it's already creeping back over $1/L here.
 

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People are incredibly irrational over gas prices. For most people, it is not even in their top 5 expenses and sometimes top 10 expenses.
Hmm... I guess I could see that for an upper-middle-class or wealthy person, gas might not be in their top five expenses. But unless you're wealthy or don't have to drive to work, I'd be surprised if gas wasn't a major expense for most people.

I use much less gas than many people... roughly 30 litres per week, and it's still in my top five expenses. I'm only able to use that little because I live close to where I work. Still, when prices were averaging around $1.35/L, that adds up to about $175 a month.
 

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I did check GasBuddy out of curiosity... according to them, the average price in my area (Fraser Valley) was hovering around $1.05/L 10 years ago, and has averaged roughly $1.35/L over the last two years before COVID-19. These are rough figures due to the frequent swings in prices. I'm outside of Metro Vancouver, so add about $0.10/L to those numbers to get Vancouver prices. (Compare the charts for Vancouver, Abbotsford, and Winnipeg or Toronto.)

I think the reason there's so much talk of price-fixing and gouging is the massive swings in prices, and the fact that prices tend to jump quickly in reaction to oil price increases or news events, but then take much longer to fall in response to lower oil prices, and rarely seem to fall as much as they logically should. There have always been swings in prices, but these exaggerated upward swings are a recent phenomena. Prices generally tracked inflation up until the early 2000's. I can't recall exactly when prices became "expensive", but I do remember $0.70/L being considered normal as late as 2004.

When prices remain elevated for long enough, people become conditioned to paying more. Nowadays, anything under $1/L seems "cheap", even though inflation-adjusted prices should probably be closer to .85/L (calculation for my area based on prices pre-2005). We've seen some reasonable prices over the last two months or so, but it's already creeping back over $1/L here.
That $1L is a very low price. Everyone is losing money at $1L. There is no profit margin, only profit loss. Your gasoline is currently being subsidized by absolute destruction of hundreds of billions of money invested in US shale. There is no question it is an amazing once in a decade deal - you may never see $1/L again after this.

These prices will last as long as the 40-50% annual declines in US shale oil can hold up. Prepare to be paying a heck of a lot more than $1/L. There is nearly zero new investment in oil production almost anywhere in the world, and declines are rapid, and the world still only has 30-40 days of oil supply.
 

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The only hedge I can think of is to buy a refiner like Suncor or Valero, who make more money on the refining margin. Those stocks will go up when people start driving again and they can get back to a more normal margin.
This is the best approach that comes to my mind too. Although it is not a perfect hedge and a lot of other factors are introduced, in the long term, it could somewhat hedge all energy costs (not just gasoline). It could be implemented as a buy-and-hold strategy and integrated into an equity portfolio. Bill Bernstein considers commodity stocks a hedge for inflation, which is a bonus.
 
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