Another Energy Sector “Pair” with High-Octane Profit Potential

In yesterday’s post, I explained how increased market volatility is a good time to looks for “pairs” trades, which give you a handy hedge in unsettled financial markets.

A few months ago, I wrote about just such a profit opportunity in a spread trade between natural gas and crude oil. At that time I was concerned about a potential energy-sector correction due to slowing growth; a correction that may have now started. So rather than make an outright directional bet in energy markets, I saw an opportunity to profit from a spread trade instead.

Specifically, I was bullish on the price of natural gas, which was way undervalued relative to its cousin, crude oil. In such a trade, it doesn’t really matter where the overall market goes, just so long as the spread narrows, you’ll make money.

A similar opportunity is now in place between crude oil and its distillate offspring, gasoline.

If You Think Prices at the Pump are High Now… Hold on to Your Wallet

Since June 1st last year, crude oil surged almost 58% higher in price, that’s including its recent pullback to just above $100 a barrel. Over the same period however, the price of unleaded gasoline has only advanced about 19%.

Now, I realize many of us are already suffering from sticker-shock at the pumps these days. In fact, my soccer-team toting Ford Explorer now takes about 80-bucks per fill-up! I’d switch to a Honda, but I just can’t fit six 11-year old soccer players in it – unless I strap a few on the roof.

Anyway, back to the spread-trade in gasoline and crude. Gasoline prices are spiraling to record highs already, but hang on to your wallets, because indicators I watch suggest a gallon of unleaded may soon shoot even higher in price.

Here’s the thing: prices at the pump usually climb as America enters its summer travel season, boosting demand for gas. Over the past five years, demand for gasoline has jumped on average 4% between April and July, according to a recent Bloomberg article.

Crude Oil and Gasoline Prices are Out-of-Whack

Commodity traders should be bidding up the price of unleaded gasoline to match rising crude oil, and in anticipation of seasonal trends kicking in. However, unleaded gasoline is actually dirt-cheap right now compared to crude.

In fact, Bloomberg points out that: “a barrel of wholesale gasoline fetched 50-cents less than crude oil last week.” This marks only the fifth time in the past 20 years that refined gasoline sold at a lower price than crude, according to data from the New York Mercantile Exchange.

As seasonal trends begin to kick in – and April is just a week away – we could see unleaded gas play catch-up to crude in a very big way. In fact, research suggests that investors who sell crude oil to buy gasoline “may return about 20-percent by June” as the price difference between the two is bound to rise in favor of gasoline, according to Bloomberg.

Now Here's A Handy Way to Play It...

Until recently, investors in unleaded gas had pretty much just one option: open a commodity-futures trading account. But in February, the folks that came out with the first crude oil ETF (USO), and the first natural gas ETF (UNG), struck again: launching the U.S. Gasoline ETF (UGA). This fund tracks the price of gasoline, as measured by changes in the price of futures contracts for unleaded gasoline traded on the New York Merc.

So it’s now possible for you to easily execute this particular “pairs” trade with ETFs in your standard brokerage account, and you can do it all in the same fund family – by shorting USO and going long UGA.

Now let’s hope lots of Americans are willing to load up the family-truckster for summer vacation... $4-plus gasoline notwithstanding!

P.S. Today, readers of my signature investment service, Market Shock Trader closed out a call option trade on the U.S. Natural Gas ETF (UNG) for gains of 159.7%. If you would like to access details of my NEXT energy sector options play, sign up for a risk-free trial of Market Shock Trader.