How I Hedged My Oil Exposure (and how you can too!)
Oil prices are a lot higher than they were 18 months ago. I used to fill up for $1 and change a gallon - those days seem gone for good. But Southwest Airlines, a big consumer of jet fuel, is still paying less than $26 per barrel for its oil this year. Big guys can hedge like this by purchasing futures contracts on the NYMEX. Unfortunately the minimums for these contracts are high (1,000 barrels of oil or 42,000 barrels of gasoline) - so I couldn't use them. A while back I made up my mind that I was not going to be victimized by high oil prices - I found a way for the small consumer to fight back.
The first no-brainer step would be to get a Citibank Dividend Platinum Select card. You get 5% off gasoline - it's a great deal as long as you pay it off each month.
I went a step beyond that and bought a basket of income producing Canadian Royalty Trusts. Essentially I bought a bunch of oil (these companies all own lots of oil reserves), but I don't the hassle (or smell) of storing it in my garage or living room. Canadian Royalty Trusts are stocks that trade on the Toronto Stock Exchange. I purchased OTC US dollar denominated 'Pink Sheet' versions of these. (I have heard that Scottrade and Ameritrade will let you buy these directly).
These stocks are highly sensitive to the price of oil - if oil goes up, they go up. If oil goes down, they go down. It's very simple 'do it yourself' hedging.
One of my favorites, Bonavista Energy Income Trust, still has a yield today of over 10%. (It has had a massive runup since I bought it and I am not buying more at these prices since I own enough). (I would suggest a visit to the mcdep website - there are free listings and valuations of a ton of energy stocks - some of which are still great values).
The extra dividend I get from owning a little bit of this one security (instead of a money market or a regular mutual fund) more than covers my extra out of pocket expenses from higher gas.
I am hedged. Beautiful.
-fg
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