Yesterday, the U.S. Department of Energy reported the biggest BUILD in crude oil supplies in a decade, indicating a fall off in demand. Meanwhile, gasoline stockpiles FELL by 4.5 million barrels. This says gas consumption continues to rise. So how can you profit from these divergent moves in energy markets? Easier than ever before actually!

Today’s unsettled trading environment is not for the faint of heart, that’s for sure. This is no time to climb out too far on a limb – whether going long or short on the markets. That’s because we’ve seen our fair share of whipsaws lately – sharp moves in BOTH directions – often within days of each other.

But there’s one investment strategy that’s tailor-made for this kind of market: They’re called “pairs” trades.

In February, I wrote about just such a “hedged” profit opportunity in a pairs-trade between natural gas and crude oil. At the time, I was concerned about a potential correction in crude due to slowing growth. Now a correction may have started.

So rather than make an outright directional bet in energy markets, I saw an opportunity to profit from a spread trade instead.

The Double-Profit Play with Crude Oil’s Cousin

Specifically, I have been bullish on the price of natural gas, which is way undervalued relative to its cousin, crude oil. I pointed out that with easy-to-trade ETFs, it’s now possible to effortlessly go long natural gas (UNG) while shorting crude oil (USO) without ever trading a single futures contract.

In such a trade, it doesn’t really matter where the overall market goes. As long as the spread narrows between natural gas and oil, you’ll make money.

A similar opportunity is now in place between crude oil and its distillate offspring, gasoline.

If You Think Prices at the Pump are High Now…
Hold on to Your Wallet

Since June 1st last year, crude oil surged almost 58% higher in price. Over the same period however, the price of unleaded gasoline has only advanced about 19% (see graph above).

Now, I realize many of us are already suffering from sticker-shock at the pumps, so the last thing you want to hear about is higher gas prices. In fact, my soccer-team toting Ford Explorer now takes about 80 bucks per fill-up! I’d switch to a Honda, but I just can’t fit six 11-year-old soccer players in it – unless I strap a few to the roof.

Anyway, back to the spread-trade in gasoline and crude. Gasoline prices are spiraling to record highs already, but hang on to your wallets, because the indicators I watch suggest a gallon of unleaded may soon shoot even higher in price.

Here’s the thing: Prices at the pump usually climb as America enters its summer travel season, boosting demand for gasoline. Over the past five years, demand for unleaded has jumped on average 4% between April and July, according to a recent Bloomberg article.

Crude Oil and Gasoline Prices are Out-of-Whack

Right now, commodity traders should be bidding up the price of unleaded gasoline to match sky-rocketing crude oil, and in anticipation of seasonal trends kicking in. However, unleaded gasoline is actually dirt-cheap right now compared to crude.

In fact, Bloomberg points out that: “A barrel of wholesale gasoline fetched 50 cents less than crude oil” just two weeks ago! This marks only the fifth time in the past 20 years that refined gasoline sold at a lower price than crude, according to data from the New York Mercantile Exchange.

As seasonal trends begin to kick in (April is already here), we could see unleaded gas play catch up to crude in a very big way. In fact, research suggests that investors who sell crude oil to buy gasoline “may return about 20-percent by June” as the price difference between the two is bound to rise in favor of gasoline, according to Bloomberg.

Now Here’s A Handy Way to Play It…

Until recently, investors in unleaded gas had pretty much just one option: Open a commodity-futures trading account. But in February, the folks that came out with the first crude oil ETF (USO), and the first natural gas ETF (UNG), struck again: Now they’ve launched the U.S. Gasoline ETF (UGA). This fund tracks the price of unleaded gasoline, as measured by changes in futures contracts traded on NYMEX.

So it’s now possible for you to easily execute this particular “pairs” trade with ETFs in your standard brokerage account. And you can do it all in the same fund family – by shorting USO and going long UGA.

It looks to me like the “spread” is already narrowing between crude and unleaded as gasoline inventories melt away faster than the polar ice caps. With millions of Americans getting set to load up the family-truckster for summer vacation…I expect gasoline prices to move much higher and close the gap with crude oil.

MIKE BURNICK, Senior Editor & Global Markets Analyst

P.S. Last week readers of my signature investment service, Market Shock Trader closed out a call option trade on the U.S. Natural Gas ETF (UNG) for gains of 159.7%. If you would like to access details of my NEXT energy sector options play, sign up for a risk-free trial of Market Shock Trader.