How to manage your gas expenses?

As the price of crude oil has fallen sharply, gasoline which is derived from crude oil, has followed suit. To many drivers, especially commuters who drive to work every day, gas price contributes a large part of their monthly expenditure. Although the gasoline price has fallen from the peak of around $5 in the summer to about $2 now, drivers should implement certain hedging strategies so that they don’t have to worry about the spike of the volatile gas price again.

One way to do so would be an unreliable method of investing in gas companies such as Chevron, Exxon Mobile, etc. The profitability of these companies is partly derived from the gasoline sales at gas stations around street corners. However, unexpected corporate events also affect the stock prices which affect equity investors’ profit or loss. Therefore, since gas companies’ stock prices are not an accurate indicator for gasoline prices, this method has several weaknesses as a hedging strategy.

Besides using this indirect hedging strategy, we can use another method to directly hedge drivers’ gas expenses by investing in the United State Gasoline Fund (NYSE Arca: UGA). UGA is an exchange-traded fund (ETF) which seeks to track, net of expenses, the changes in percentage terms of the price of gasoline. This works because the retail gasoline price at the gas station is correlated to the gasoline future price traded in the New York Mercantile Exchange, with which gasoline futures are one of the most actively traded futures contracts and represent the primary US benchmark for gasoline prices. This ETF will invest in the futures contract on unleaded gasoline delivered to the New York Harbor traded on the New York Mercantile Exchange that is the near-month contract to expire. So why will investing in UGA stabilize drivers’ gasoline expenditure? If the price of gasoline futures rises, UGA price will rise as well, which will offset the increase in gas price.

Therefore, when another oil crisis or hurricane in the Gulf coast turns the oil market upside down and everyone is complaining abut the surge in gas price, you can just sit back without worrying about the high cost of pumping another gallon of gas.