The price of oil is rising, and gasoline prices are rising along with it.
The price of a gallon of regular gasoline rose 54% since its low in February 2016. Look at the chart below:
The price of regular gasoline bottomed at $1.64 per gallon in February 2016. Today, it costs $2.52 per gallon. That means the price of regular gasoline is up 54% over the past two years.
However, if you drive a car that needs premium gasoline, then you are paying even more at the pump.
Cars Need the Good Stuff
Today, the average price per gallon of premium gas is $3.06. That’s a 54 cent per gallon difference thanks to increased demand. That’s a giant spread. A decade ago, the gap was just 21 cents per gallon.
The reason is rising demand. Today, premium gasoline makes up nearly 12% of all gasoline sales. That’s a 13-year high.
We expect high-performance engines like those in the BMW M3, Porsche 911 and Audi S4 to need premium, 91-octane gasoline. However, cars like the Nissan Juke and Scion FR-S (now rebranded as the Toyota 86) also need the premium stuff.
The website BestRide.com compiled a list of cars made in 2016 and 2017 that need premium gasoline. It turns out that carmakers designed 111 different models in 2016 and 2017 that need the good stuff.
That’s why there’s a 21% premium for 91-octane gasoline today.
Premium Plays on Gasoline Stocks
At the same time, it’s harder to make premium gasoline. Premium gasoline has a higher octane rating, which is a measure of the compression the fuel can take before igniting.
Unfortunately, shale oil is high in paraffins (like the wax). That lowers the octane level of the resulting gasoline. In addition, new “clean” gasoline specifications reduce the octane levels. That means refineries must add expensive boosters to create the high-test gasoline.
The record demand for high-performance gasoline contributed to the incredible performance of refining and gasoline stocks stocks in 2017. Companies like Valero Energy Corp. (NYSE: VLO) and Phillips 66 (NYSE: PSX) rose 52% and 31%, respectively, since June 2017.
That’s a trend that should continue through 2018. If you own a premium gasoline car, you should own a refiner or three to hedge that cost.
Good investing,
Matt Badiali
Editor, Real Wealth Strategist