U.S. States Should Hedge Their Oil


"The product that could be hit hardest with global government spending is diesel."

The combined fiscal stimulus packages announced by China and various OECD countries will come in pretty close to two trillion. After a review of intended projects from Australia to Europe to the U.S., it seems clear that individual states need to start hedging their future oil usage.

With lots of slack in global labor markets, it's not likely cost overruns to government work projects will come from the labor side. Rather, with global oil prices at multi-year lows, the greatest variability in cost will come from oil.

True, we don't have the final package yet from the U.S. Additionally, we know the bill already suffers from too much reimbursement spending and not nearly enough new infrastructure. That said, even if demand growth for oil is largely flat in the private sector there is still enough proposed highway, bridge, transport, and construction spending combined, globally, to warrant insurance.

The product that could be hit hardest with global government spending is diesel. Diesel is the fuel of construction, from heavy equipment to generators. It should be noted the European GASOIL contract has been quite lively and strong in 2009, and it keys off Brent that continues to carry a 5% - 10% premium to NYMEX. By spring, we could begin to see refineries come back into action as demand for product rises.

States don't need to hedge all their oil. They could just hedge some. They should consider June and December contracts for both 2009 and 2010. June NYMEX is at 47.50 today and December NYMEX is trading at 53.00.

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