You’ve probably noticed that gas prices are rising. In fact, regular-grade gasoline is up 10 cents a gallon over the past two weeks. Well, brace yourself. Prices are probably going a lot higher.
The good news is that, at $2.44 per gallon, the average price of U.S. gas is still 15 cents per gallon cheaper than a year ago. But that’s about the only good news.
The bad news is that average U.S. gasoline prices may approach $3 a gallon this summer. That’s according to Citigroup, which points to OPEC production cuts and geopolitical disruptions as the big price drivers.
But I believe the more important factor is that inventories of gasoline fell hard in April, by the most since 2017. Meanwhile, refineries are running near full capacity. Here’s a chart I made on my Bloomberg terminal …
You can see that U.S. gasoline inventories slid by 7.7 million barrels in April. Wow! Meanwhile, refineries are running near 98% capacity. That’s not much room for error.
And cap utilization is high despite unplanned outages at some U.S. refineries, including one caused by a fire at Exxon Mobil’s Baytown refinery. That led to the shutdown of one of its key gasoline-making units, adding to upward pressure on prices.
Meanwhile, global demand for gasoline and other oil-based products is growing, with Chinese demand leading the way.
And that’s important, because the U.S. and China are – if you can believe Presidential economic advisor Larry Kudlow – very close to signing a trade deal. As part of our ongoing trade spat, China cut down on imports of oil and oil products from the U.S. What do you think will happen when and if a trade deal is worked out?
I’d say that China will start importing more oil and gasoline from the U.S. again. And that will put MORE upward pressure on prices.
It also means the $3 target for gasoline that Citigroup is pointing at may be conservative.
There are a couple of ways to play this. And by that, I mean you can profit handsomely.
Pick #1: Refineries. As gasoline prices go higher, refineries cash in. The VanEck Vectors Oil Refiners ETF (NYSE: CRAK) is a nice way to play that group. It sports a 1.8% dividend yield to boot.
Pick #2: Pipelines. All that oil and gasoline has to be transported. So, pipelines – which are usually master limited partnerships (MLPs) for tax reasons – should do very well. The Alerian MLP ETF (NYSE: AMLP) holds a bunch of them, and it sports an 8.04% dividend yield. Nice!
Higher gasoline prices are coming. You can gripe about it, or you can profit off it. Whatever you do, make sure to do your due diligence before buying anything.
All the best,
Sean
