Despite the record amount of money the average U.S. consumer spent on gasoline in 2011, Americans could be facing another year of higher pump prices. Already, motorists will have paid more, on average, for a gallon of self-serve regular gasoline in 2011 than ever before, and the national average price for gas sits near $3.52 per gallon. As crude oil surges higher and emerging markets continue to see economic growth, analysts now estimate that gasoline will retest its highs. For consumers, the implication of higher gasoline prices could wreck any sort of recovery. However, for investors there are ways to circumvent the future gain in prices and potentially profit. (Find out how to invest and protect your investments in this slippery sector. For more, see What Determines Oil Prices?)
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Record Prices in the New Year
The average American family will have spent around $4,155 this year on filling up their tanks or about 8.4% of their income. This is the highest amount spent since 1981 and more of the same could be on the horizon. According to the International Energy Agency, global demand for crude oil will climb more than 1.4% in 2012, with China requiring more than a 10th of that amount used. As emerging markets continue to expand at rapid paces, this demand will only get larger over the next few decades.
The second problem lies within the fact that the majority of American refineries use more expensive Brent benchmarked crude oil to produce gasoline. As protests in the Middle East and falling production from Europe has kept Brent prices high, refiners in the Gulf have had to pay more, in order to get access to feed stocks. This has ultimately driven prices for a variety of distillates upwards.
While recent developments and record production in the Bakken shale has created a glut of WTI crude in the Midwest, getting that oil to the refiners has proving very difficult. Enbridge's (NYSE:ENB) recent decision to reverse the Seaway pipeline to flow into the Gulf will alleviate some of the pressures, but in the wake of the news, WTI prices have risen higher. Overall, analysts predict that WTI will meet Brent prices as it becomes a global benchmark once again. An analyst survey conducted by Bloomberg predicts that this rising demand will push WTI crude prices to reach an average of $100 a barrel in 2012.
At the end of the day, average prices for oil feed stocks will stay stubbornly high and push average gasoline prices higher in the new year.
Profiting from Pump-Pain
With the long-term demand trends in place for crude oil and gasoline, it makes sense to add exposure to the energy sector. Hedging one's own energy costs in the new year could be one of the best portfolio plays. For a direct way to bet on higher gasoline prices, the United States Gasoline (ARCA:UGA) ETF tracks unleaded gasoline future contracts. While the fund has suffered from contango, a condition where the next month's contract is more expensive than the front month, making it economically viable for a buyer to purchase the commodity now and store it, the fund could be a good direct bet on gas prices. Similarly, investors can use the PowerShares DB Oil (ARCA:DBO), which uses a unique index that helps to eliminate contango's effects.
As demand for gasoline continues to climb, oil service stocks like Halliburton (NYSE:HAL) products will be in higher demand. After all, higher oil prices will make nontraditional energy assets more attractive. The former HOLDR, the Market Vectors Oil Services ETF (ARCA:OIH) is the best way to bet on the sector's growth. With $913.66 million in assets, the ETF tracks 25 different oil service firms, including Baker Hughes (NYSE:BHI) and FMC Technologies (NYSE:FTI). Net expense ratio for the fund run a rock bottom 0.35%.
The Bottom Line
Despite the fact that American consumers spent a record amount on gasoline during 2011, 2012 could be more of the same. Growing demand coupled with rising feedstock prices will ultimately drive gas prices higher. For investors, betting on the energy sector and hedging your own gas prices could be one of the best portfolio plays in the new year. (For additional reading, check out A Guide To Investing In Oil Markets.)
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.