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Gas Price Prop Betting
One of the reasons that I love handicapping and betting non-sport
proposition bets is that you can frequently find amazing value.
Such was the case with Pinnacle's well publicized proposition bets on the
price of gas. They've got two bets posted--a "yes or no" prop on
the average price of gas reaching $2.50 a gallon nationally by 1/1/06, and a
similar prop on the average price in New York or Los Angeles reaching $3.00.
Earlier today I instructed my clients to bet the "YES" on both
propositions--at the time of release the "national" gas prop was +145
YES and the NY/LA prop was +364 YES.
The “yes” position on both props has been bet down
substantially. The LA/New York gas
price prop is down to +222 and the national average prop is down to +105.
I won’t take all of the credit for this, since Pinnacle has received a
ton of mainstream press for their gas price prop bets.
In other words, even if they have to pay out on every bet they’ve
received they’ll more than get their money’s worth out of the prop.
High gas prices are obviously no secret to any motorist, but how
high will gas prices climb? In
April, the EPA projected a summer high national average of $2.30 a gallon, which
was the second upward revision they’d made.
If anything, the EPA projection is inherently going to be on the low
side—as a government agency they’ve got political motivations to err on the
side of caution in their estimates. Furthermore,
at the time they projected the $2.30 national average it was based on the spot
market for oil reaching a high of $57.00 a barrel.
With oil closing today near $64 a barrel and analyst predictions that it
could go higher a new estimate would already be closing in on the $2.50 per
gallon mark.
The current national average is $2.33 a gallon, and the Los Angeles
average is $2.61 a gallon. New York
is also $2.61 a gallon, though typically the prices on the west coast will be
higher.
The per barrel price for oil is at record highs, and while there
may be a slight downturn in the prices I don’t see anything that could cause a
substantial drop. The oil markets
have been hypersensitive to world events this summer—the London terror attacks
caused a strong upward move, and today’s surge was attributed to threats of
terrorism in Saudi Arabia and Iran’s strong resolve about their desires to
obtain nuclear weaponry.
Another important component in the gas price equation is the cost
of refining the oil. US refineries
have been running at 96% of capacity over the past month, and fires in the past
week have taken four facilities off line. As
part of the oil market “hypersensitivity” to external events, seemingly
minor events like these have resulted in upward price spikes.
More importantly for the price of gas going forward, we’ve got the two
primary components in the pricing equation trending upward.
Even assuming that the 4 fire damaged facilities get back on line soon,
the only thing that will alleviate the production capacity problems is a drop in
demand (more about that in a moment) or the building of new facilities which
obviously can’t be done overnight.
The cost of exploring and drilling for new sources of oil is also
passed along to consumers, and with prices at record highs the oil companies
have a strong financial incentive to aggressively spend money to bring more
product to market. Again, another
component of the pricing formula with an upward trend.
Most importantly, perhaps, is that the consumer demand for gas has
not only remained strong but has increased significantly despite the spike in
prices. That could be a function of
the overall strength of the economy, but nevertheless there have been no signs
of weakening demand whatsoever. Simple
economic theory dictates that at some point prices will get high enough to
lessen demand, but from the looks of it this won’t happen anytime soon.
While the cost of gas has never hit $3.00 a gallon in the US, there
is some historical precedent for this lofty plateau.
Adjusted for inflation, gas reached a high of $3.11 a gallon in 1981.
Listening to CNBC and Bloomberg today, where the $64 a barrel oil
prices were the top story, most petroleum industry analysts predicted “at the
pump” price increases of .15 to .20 a gallon nationally, with “substantially
higher” price jumps on the west coast. Those
projections would put gas prices right in the “target area” for cashing the
bet.
Historically, demand for gas is greatest during the summer but
temporary price increases of .10 or more per gallon frequently occur around
holidays with high travel volume. With
three of those still to come before the end of the year (Labor Day, Thanksgiving
and Christmas) this could result in even higher gas prices.
As I see it, for gas prices to not hit $2.50 a gallon
nationally and $3.00 a gallon on the west coast several things would have to
happen. First, there would have to be some very good news out of the Middle East
to indicate the region is becoming less volatile.
Second, there would have to be a strong decrease in consumer demand for
gas and, finally, production demands at the refineries would have to ease.
Unless such a perfect confluence of events occurs—and these trends are
strong enough to be reflected in the oil markets—it looks like the pricing
trend, as well as the individual components therein, is decidedly upward.
That’s what made the YES position on this bet so
appealing—we’re getting underdog money in a situation where it appears that
the stars have to align in just the right way for gas prices to fall short of
these plateaus. That’s called
“finding value”, and that’s the name of the game in sports betting.