The price of gasoline rallied above $3.50 the previous two times it fell below $3. If that happens again, then profit margins for oil producers should expand commensurately.
Wall Street is not pricing that possibility into their valuation models. If anything, they are projecting a gradual drop in gasoline prices as the unemployment rate creeps up, and the number of commuters declines proportionately.
Hence, the aforementioned investment opportunity. When the price of gasoline rises, so too do the share prices of the companies that sell it.
Extreme Movements
The simplest way to participate in a sudden rise in gasoline prices is by owning shares of a sector fund such as the Vanguard Energy ETF (NYSE: VDE). Its top three holdings, Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), and ConocoPhillips (NYSE: COP), account for roughly 45 percent of its total assets.
So far this year (through 9/23), VDE has gained nearly 3 percent. That pales in comparison to the 13 percent return posted by the SPDR S&P 500 ETF (NYSE: SPY) over the same span.
That also makes energy one of the poorest performing sectors of the S&P 500 this year. Last year, it finished 9th out of the 11 sectors. The year before that, it came in second-to-last.
There is some recent historical precedent to suggest this trend may soon reverse. In 2014 and 2015, energy was the worst performing sector of the index. The following year it finished first.
From 2018 through 2020, energy was once again the worst performing of all the sectors. It finished first the next two years.
Data Dependent
So far, the options market expects oil prices to stay where they are. At the start of this week while VDE was trading near $127, the call option that expires in six months at that strike price could be purchased for $8.
For that trade to be profitable, VDE must rise more than 6 percent by March 20. That implies 12 percent annual appreciation, which is in line with the sector's long-term historical performance.
There is another consideration regarding energy prices that isn't yet getting much attention. That is rapidly escalating demand for large data processing centers to accommodate artificial intelligence (AI).
In the communities where those data centers are located, they are putting a strain on the local electric utility grid. Those utilities must ramp up their generating capacity quickly, and the most readily available fuel to do that is natural gas.
The big oil companies that dominate the sector are also some of the biggest producers of natural gas. Even if the price of oil remains flat, natural gas prices could escalate quickly as more data centers come online. Everybody wins.
Pressing pause on the benefit fear train
The Trump administration has been shaking things up inside the D.C. beltway… and it's threatening to impact popular entitlement programs like Social Security.
Whether that turns out to be true, or just another bit of "fake news," you owe it to yourself to check out a little known loophole my colleague Jim Pearce has discovered.
It allowed a small handful of regular Americans to collect over $115 million last year. You can join them by getting the full story here.
