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  1. Default Hedging Against Higher Fuel Costs

    I wonder if this has already occurred to anyone. For those of us planning Summer road trips, fuel cost will be a major factor to consider in making any plans.

    I know the airlines, municipalities and other large entities hedge against higher costs in the future by purchasing options or contracts for fuel at a certain price very far ahead of time. Back when gas was $4.00 per gallon here in Chicago I read a report that the CTA had purchased their fuel for $2.65 per gallon so the prices would not affect fare costs in the near future. Southwest Airlines also had a deal much like that - they purchased their fuel years ahead of time - or rather options on the fuel at a certain price - much lower than the market price at the time.

    I hoping that someone smarter than I am can explain if there is a method for individuals to do the same. I know anyone with an account can trade on the options/futures markets. I wonder if I went out and bought $100 worth of options for $2.00 per gallon gasoline option/futures and gas was $5.00 per gallon next summer, I could sell the option/future at a premium and make up the difference in what the fuel will cost on the trip, therefore protecting myself.

    Does this theory have any legs?

    I don't think this would be a great idea for everyone, but for those already active in the market might find it useful....

    Just a thought.

  2. #2
    Join Date
    May 2003
    Green County, Wisconsin

    Default technical

    I really have no idea about the trading market aspect of things, however, it sounds like you might be oversimplifying the situation. The companies and entities that you are talking about are making purchases in the millions of gallons, thus they have some power in the market.

    I do know that I have heard of at least one or two co-op type places where you can "bank" fuel, and you might even be able to work something out if you have a relationship with a local oil distributor. However, anything like that tends to operate on a very local basis, and doesn't really help you if you are on the road traveling.

  3. #3


    The short answer is yes. Here is a ticker for a gasoline fund;


    Essentially you could buy call options far out of the money (ie strike price way above the current market price) just in case gasoline prices in the USA rocket up unexpectedly. Options and futures are a speculators game though.

    You could literally open a commodities trading account, but I have little knowledge regarding a good service for that. Likewise it does not make sense for an attempt to hedge ~300 gallons, and with margin and fees involved, it may be counterproductive on a small scale investment.

    Otherwise you could invest some money in this fund. Assuming gasoline prices rise, you would make up the difference when you cash it out to travel this summer.

    Personally, I don't think trying to hedge gasoline would be in your best interest. Options and futures are very risky as a whole.

  4. Default

    Quote Originally Posted by Midwest Michael View Post
    The companies and entities that you are talking about are making purchases in the millions of gallons, thus they have some power in the market.
    I agree -- I don't think the oil companies are interested in us individuals.

    The best thing we individuals can do is to choose fuel-efficient cars. Of course, if you already own a gas-guzzling SUV, it doesn't necessarily make sense to trade it in just so you can spend less at the pump -- but it does make sense to think about fuel efficiency when it's time to trade next time.
    Quote Originally Posted by Mustang_K View Post
    Options and futures are very risky as a whole.
    I agree. Not too long ago when gas was $4 (or even a little higher), I would've sworn that the prices were going to settle back to around $3 and that would become the "new normal". Instead, they're back to $1.80. If I'd "bought in" at what I thought was a good price, I would've been sorely disappointed.

  5. Default Mustang K Has it Right

    Although I'm not any sort of expert on this subject, Mustang K seems to know what he is talking about.

    I'm not suggesting buying 100 gallons of fuel to cart around with you on your trip. I'm also not suggesting investing in Exxon or Mobile or any other gas company to hedge your trip.

    What I am suggesting is that you can purchase a position on a product (any product) for pennies, not dollars, to ensure your future plans. If you are going to need 500 bushels of corn next summer, you can buy a future for 4 cents a bushel today in order to have the right to buy them at $1 a bushel next summer- that's $20 for the future, and if corn is $5 a bushel it's a savings of $20,000. If the corn is less than $1 per bushel, you lose $20. That's it, that's how options and futures work and you can get into them at any level of investment.

    The spreads are much closer than the example I used - but with gas fluctuating between $1.80 and $5.00 a gallon it seems prudent to consider this option. Just figuring out how is the question.

  6. #6
    Join Date
    May 2003
    Green County, Wisconsin

    Default Fuel Bank

    Mustang, I didn't notice that you were in Minnesota when I made my first response, but the fuel bank program I was talking about is actually located in St. Cloud. If you're in the cities, its probably too far for you to take advantage of unless you drive up I-94 alot, but it certainly fits the concept you are talking about but in a very tangable way.

  7. #7

    Default The fuel bank...

    I went to college in St. Cloud so I'm very familiar with the fuel bank.

    You could 'prepay' for x number of gallons today and use the gallons as you see fit in the future.

    The clincher is there is a fee to do this, so you'd better be certain that prices will not fall, otherwise you simply wasted you money locking in x many gallons at such a price.

    The margins in real life are much closer. While I have not traded futures, I know a fair amount about them. And I'm having a hard time seeing the value created by hedging.

    Gasonline contracts are standardized at thousands of gallons, so you could buy a 10,000 gallon contract @ $2.00 a gallon. Each cent tick would equal $100. So if gas rocketed up this summer, you'd make a fortune! The leverage cuts both ways though. Since you are not using physical delivery for these contracts, if gas will continue downward (which I believe it will in this deflationary economy), you would recover less than you invested minus the fees and commissions.

    To be honest, the most simply and safe hedge, would be to buy a large ~100gallon gasoline drum and fill it up today.

    We have a negative yeild curve in effect meaning interest rates are downward sloping. Future commodity prices usually drive yield curves which implies that prices are going to continue downward in the foreseeable future.

    All that said, a 'safer' bet would be to buy that UGA and hold. Commodities act as a great hedge for inflation and it is reasonable to think that in the long term gasoline will rise in price.

  8. Default Agreed

    Yes, unless a National Fuel Bank were created where you could use it while traveling this idea seems to be a bit would be better off just saving some money toward an upswing in prices and if they are still low you get to buy more junk from the souvenir vendors along the way.

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