February is typically a month when gas prices recede – but not this year.
The average price for U.S. gas has climbed more than 10% in just the past two months. This suggests a trajectory that could produce a spike of 60 cents a gallon or more by May.
"I actually believe that prices will be moving higher than 60 cents a gallon on average," Money Morning energy expert Dr. Kent Moors recently told Executive Editor William Patalon III. "By mid-summer, in fact, we could see $5 a gallon being reached in certain regions of the U.S. market."
Here's why we could be facing the most painful year at the pump – and how you can offset record-breaking gasoline costs.
What's Driving U.S. Gas Prices to $5 a Gallon
Usually, higher gas prices result from low supply and high demand, but that's not the case this year. Even with consumption growing in emerging markets like China and India, the current surge in gas prices isn't based on increased demand for crude oil.
In fact, according to Tom Kloza, chief oil analyst for the Oil Price Information Service (OPIS), demand for oil is at its lowest point since April 1997.
Instead, there are a new set of factors pushing U.S. gas prices higher, including:
1. An Escalation in Mideast Turmoil
Iran's nuclear standoff with the United States and Israel has escalated. Iran two weeks ago indicated its intention to impose fuel squeeze on Europe in retaliation for an impending boycott of Iranian oil. Iran has also threatened to blockade the Strait of Hormuz, through which 20% of the world's oil supply travels.
What's more, the humanitarian crisis in Syria, which just prompted a new round of sanctions from the EU in addition to an existing embargo on Syrian oil, has contributed to fears of regional instability.
2. Pinched Refinery Capacity
Refiners are getting squeezed by higher crude prices, forcing some to shut down rather than operate at a loss.
ConocoPhillips (NYSE: COP) recently closed three Philadelphia-area refineries that together represent about half of the refining capacity in the Northeast United States. Sunoco Inc. (NYSE: SUN) has idled a refinery in nearby Marcus Hook, PA. The Hovensa refinery in the U.S. Virgin Islands, a partnership between Hess Corp. (NYSE: HES) and Petroleos de Venezuela SA, closed in mid-February to stem $1.3 billion in losses over the last three years. A fire shut down the BP PLC (NYSE: BP) refinery in Blaine, WA, which was responsible for one-fifth of that state's gasoline.
"Some of those refineries represented the key to a smooth spring transition from winter to spring gasoline," OPIS' Kloza said of the closed facilities.
3. Speculative Money
Kloza attributes the rise in gas prices to hedge funds and big money managers buying up gasoline futures contracts.
"We've seen about $11 billion of speculative money come in on the long side of gas futures," said Kloza.
So the current high prices are based on little more than the expectation that gas prices are set to rise even higher.
"Speculation is now part of the DNA of oil prices," Fadel Gheit, a 30-year veteran of energy markets and an analyst at Oppenheimer & Co., told McClatchy Newspapers. "You cannot separate the two anymore. There is no demarcation."
Demand might be down and supply might be up, but there's no shortage of factors edging gas prices higher. When those factors combine with rising demand in spring and summer, pump prices will skyrocket.
Profiting From the Gas Price Spike: UGA, USO, COP, XLE
Fortunately, there are several ways to hedge against a rise in gas prices.
Perhaps the easiest way to profit is to invest in an exchange-traded fund (ETF) that tracks the price of gasoline.
The United States Gasoline Fund LP (NYSE: UGA) invests in futures contracts on unleaded gasoline traded on the New York Mercantile Exchange (NYMEX). UGA rose 14.8% in 2011, and is up about 16% so far in 2012.
If gas prices jump as analysts expect, UGA should jump again, as well. In 2008, when gas prices reached a high of $4.11 per gallon, UGA was trading over $66, which is 17% above its current level.
You might also consider United States Oil Fund LP (NYSE: USO), which invests in futures contracts for light, sweet crude oil traded on the NYMEX. USO is up 8% since the beginning of February, and is currently trading about 10% below its 52-week high of $45.60. In the summer of 2008, USO hit $104.44, more than 150% above where it's trading today.
Another easy way to gain exposure is to simply buy the oil companies themselves. Consumers are most familiar with the fully-integrated major oil companies, which handle every aspect of the oil and gas industry, from exploration and drilling to marketing and retail sales.
"Most of the integrated majors will do well," Money Morning Capital Waves Strategist Shah Gilani told Fox Business' Stuart Varney last week.
Over the past six months, these household names have been on the rise: Exxon Mobil Corp. (NYSE: XOM) is up 19.5%; BP plc is up 23.9%; Chevron Corp. (NYSE: CVX) is up 13.1%; and ConocoPhillips is up over 17.05%.
"I like ConocoPhillips. I think it's going to be one of the winners if oil prices continue to rise and gasoline prices spike," said Gilani. "Conoco is great. It's going to increase its margins both on the oil and exploration side, and on the refining side. I like their expansiveness in terms of their refining operations, and they're sitting on some nice reserves. It's got a 3.6% dividend yield which helps you buy some gasoline in these environments. I think it's a great stock all around."
If you want to invest in more than one company, you can go with the Energy Select Sector SPDR (NYSE: XLE), which tracks the performance of the Energy Select Sector Index. It includes exposure to large-cap U.S. oil and gas companies like Chevron and Exxon, and will enjoy a boost when gas prices rise even higher in the coming months.
News and Related Story Links:
- Money Morning:
All You Need to Know About Iran, $200 Oil, and $6.00 Gas
- Money Morning:
2012 Oil Price Outlook: How to Profit From $150 Oil
- Money Morning:
Energy Investing is Worth Your Time and Effort
- Kansas City Star:
In absence of demand, oil prices' rise points to speculation