Friday, February 27, 2009

Don't Buy USO or USL, Buy UGA Instead

We have explained in recent posts the many issues with USO and USL (re. rolling of oil contracts). Gasoline prices in the USA and Canada have recovered during the last few weeks, as you may have seen at the pumps. The prices for gasoline you are paying now has not dropped recently, it likely has gone up.

U.S. unleaded gasoline prices has usually seasonal strength from January to the end of April. During this time refiners tend to convert from heating oil used in winter to gasoline used during the summer. Refiners also use this period to perform annual maintenance programs. Gasoline consumption goes up while inventories usually go down. This is why gasoline prices rise during this period, typically this trend lasts until May for retail prices.

In the USA, demand for gasoline is still higher in spite of the recession in the economy. A good chunk of U.S. refineries is old and need to undergo significant maintenance and repairs. If you remember, the hurricane season last year also was quite violent with many hurricanes entering the Gulf of Mexico and causing significant damage to oil and gas installations. Remember Fay, Gustav, Hanna, Ike,, Josephine, Kyle?

In addition, the spread between crude oil and refined product prices ("crack spreads") were below average late in 2008 and have not recovered much in 2009.

If you agree that gasoline prices will outperform oil, then UGA is a better investment vehicle. UGA invests in future gasoline contracts:

"United States Gasoline Fund is an exchange traded security that is designed
to track in percentage terms the movements of gasoline prices. UGA issues units
that may be purchased and sold on the New York Stock Exchange (NYSE) Arca. The
Fund is managed and controlled by its general partner, United States Commodity
Funds LLC. USG pays the General Partner a management fee of 0.60% of net asset
value (NAV) on its average net assets. USG invests in a mixture of listed
gasoline futures contracts, other non-listed gasoline related investments,
Treasuries, cash and cash equivalents. "

Below is a chart comparing USO, USL, and UGA for the last 3 months. Clearly, UGA is the top performer of the three.

(please click to enlarge)

Keep in mind that UGA is a cousin of USO/USL and may suffer from same rollover issues, but at least it offers better odds for someone who wishes to invest in this area.

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Michael said...


I figured you to be Canadian - Hogtown is what Canadians call Toronto.

Sold the TBT calls. Going to hang on to the puts since they are basically free and there is still a decent amount of time left.

Thanks for all your help, this is quite educational.

The Shocked Investor said...

Good job! Congratulations.

Deming said...


Good thing to monitor the capacity utilization percentage when the weekly inventory report comes out. Although increased driving has its impact, as the crack spread expands, there will be a point when refiners will want to increase production to take advantage.


The industry is very competitive so the pace of bringing more capacity on line is important. If too fast, too soon, supply can increase more than demand bringing on pressures that could again narrow spreads.

The Shocked Investor said...

Excellent points Seamus, thank you.

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