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GAS PRICE BETTING

Sportsbooks have a couple of new gas price prop bets, and we're going to take another position on higher national average gas prices.

The great thing about taking the "YES" position on any of these props is that due to the way they're worded, you can be wrong a lot but only have to be right once to cash your bet. If the average gas price for any day between now and the end of the year is at the right price, the bet is a winner. Conversely, to take the "NO" position if you're wrong just once-and gas breaks the listed plateau-you lose. This would be a like a football bet along the lines of "Will the New England Patriots lead an opponent by 21+ points during the 2005 season". You don't have to be a genius football handicapper to know that a bet like that is a good value by its very nature.

As I write this on 8/24/05, oil has once again hit a record high of $67.32 and is trading overnight on the Asian markets at over $68.00 a gallon. The concern now is that gas inventories are down, and yet another hurricane is threatening the Gulf Coast of the US. And the prices are most likely headed higher: "We're heading toward $70, which I think is a foregone conclusion, and any time we get near that, the market reacts," said Kevin Kruszenski, head of listed trading at KeyBanc Capital Markets.

The price of a gallon of regular unleaded (Pinnacle uses the numbers at www.fuelgaugereport.com as the "official" price) was down fractionally from the record high set earlier this week. The high so far was $2.614 (8/22) and today's average was $2.607. Based on the sudden upward jolt in crude oil prices, I expect to see the average price begin to trend upward again tomorrow.

Much has been said this summer about the financial markets ignoring a lot of positive economic data and overreacting to negative news, in particular the price of oil. With this myopic world view, its difficult to imagine anything in the short term that would exert a significant downward pressure on the price of crude oil and/or gas prices. The current market is being driven in part by concern over supply interruptions caused by terrorism, a lack of excess refining capacity, and continued strong consumer demand. In the short term, none of these factors are likely to change enough to push prices substantially downward. On the terrorism front, maybe the capture of Osama Bin Laden would be construed as "good news", but if it provoked any sort of terrorist response even that could be quickly dismissed. More refining capacity can't be built overnight, so any relief at that stage of the process won't happen soon.

Erosion in consumer demand for gas is the most likely scenario for a downward trend in gas prices, but that hasn't happened yet. That's the primary reason why inventories are low in the first place-all the gas that can be produced is being sold. The mainstream media has picked up on the high price of gas, and you've seen any number of hand wringing stories about single mom's having trouble making ends meet on their Burger King drive through salary due to the high prices at the pump. That sort of anecdotal evidence notwithstanding, the numbers indicate that demand for gas in the US is still strong. More importantly, the world petroleum market is a very interdependent network and even a strong downturn in petroleum demand here in the US wouldn't be enough to counteract record demand elsewhere in the world-particularly in China. The Chinese government subsidizes their gas industry to keep at the pump prices low, and that has resulted in a lot of their country's petroleum producers looking to exports that allow them to sell at a higher price. In the near term, any decline in domestic demand here in the US would quickly be absorbed elsewhere.

Part of the demand for gas in the US is seasonal in nature, as the summer months are historically the peak driving months for American motorists. That will come to a head over Labor Day weekend, which is one of the busiest car travel periods of the year. Typically at the pump prices jump by a nickel or more in advance of this period, and this year will be no different. An increase of five cents per gallon will put the average price at right around $2.67 or $2.68 a gallon assuming that there's no upward movement in the meantime. Based on the factors driving the marketplace, however, there almost certainly will be. I wouldn't be surprised to see the national average over the Labor Day weekend right around $2.75 a gallon.

At -213 for the YES side of this proposition at the time I'm writing this, it's not the gift price that we got on our earlier winner when the price surpassed $2.50 (my clients got that at +145). Still, with nothing in sight but a continued upward trend the YES is clearly the right side. If my projections are correct, this bet will be a winner by the first week in September.

BET: National average price of gas to hit $2.70 by 1/1/06 YES -213

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