The question is, where exactly are you going to keep 750 gallons of gasoline while you wait to use it? Unless you have about 20 standard 35-gallon trash drums sitting around your house and a lot of spare time - you’re going to need to find another way to store all that gas. Enter stage left: Oil futures.
What are oil futures?
I’m glad you asked. Oil futures are an agreement to purchase or sell oil for delivery in the future at an agreed upon price that may be satisfied by delivery or offset. In other words, they are contracts to buy oil at today’s prices for delivery in the future, say, when prices go up.
This is the strategy that successful airline carrier Southwest has used to control their fuel costs since 1999. It contributed greatly to their success over competitors and has saved them an estimated $3.5 billion dollars in fuel costs.
How can it help you?
As a consumer, you can use the same techniques as large corporations like Southwest to buy a lot of gasoline while the prices are low or, hedge your gas prices. We won’t be buying oil futures directly, because that would most likely require different kind of brokerage account, and be a lot more complex. Making your finances as simple as possible should be the idea here. What we will be using are oil futures ETFs, or Exchange Traded Funds. Much like a mutual fund, ETFs are a collection of stocks based on an index or sector that is typically picked by a fund manager.
How do you do it?
Unfortunately, in order to take advantage of this process, you will need to have all of the money that you spend on gas per year up front. But even if you only have half of the amount, you can still hedge half a years worth of gas.
-Figure out how much gas you need to buy
Using this spreadsheet, enter the relevant information in order to calculate exactly how much money you’ll need to hedge your fuel costs. You only need to fill in the GRAY boxes, and the GREEN box will tell you how much you need.
-Open an account
It doesn’t matter who your account is through, but you’ll need some kind of brokerage account. I recommend a discount brokerage like Zecco or Scottrade. Zecco offers four free trades per month and you can get 3 free trades with a new Scottrade account by using my referral ID: GZMN8881, I will also be credited 3 free trades if you use it.
-Transfer the cash
Transfer the amount of money calculated with the spreadsheet into your brokerage account. This is the money we will be using to buy the oil ETFs.
When the price of gas gets to a level where you wouldn’t mind paying that same price all year, buy it! Make your investment and lock in those gas prices. You’ll either want to buy ‘OIL’ or ‘USO’. Both will work well for our purposes. Keep in mind that the prices of these futures funds won’t exactly reflect the price of gasoline, as prices can be very different across the U.S. But, they will absolutely trend with the price of gas enough to compensate for any rises in price.
Now that you have all your fuel hedged for the entire year, you can drive worry free, knowing that you’ll not have to pay any ridiculously high oil prices should they start to rise again. When it comes to cashing in your account, you’ll need to be careful how you do it. I would recommend pulling the money out in 3-6 month intervals, so you don’t have to pay much in commissions for the trades. On Scottrade, you’d have to pay $7 per trade, and that can eat away at your profits if you take money out say, every month. Remember, the point of doing this is to save as much money as possible!