I spent last weekend at my daughter’s house near Washington DC. It is a 375-mile drive from my house to hers, or 750 miles round trip. It takes me about six hours each way.

I’m happy to do it. I get to spend some quality time with her dog while my daughter leaves town for a few days to visit friends. Everybody wins.

I can make that trip for about $70 in fuel costs. That hasn’t changed much over the years. As the price of gasoline has gone higher, so has the fuel efficiencies of the cars I have owned.

Moving Averages

Of course, the price of gasoline is closely tied to crude oil prices. That’s because demand for gasoline is fairly constant while geopolitical events can severely disrupt supply.

Such was the case three years ago, when gasoline soared above $4.80 due to financial sanctions imposed on Russia after it invaded Ukraine.

The retail price of gasoline has been stuck around $3 a gallon this year. That is about 10 percent higher than its average price of $2.77 over the past ten years as shown in the chart below.

You can readily see that during the five years prior to the COVID-19 outbreak, the price of gasoline was below the 10-year average price. Since then, it spent most of that time above the 10-year average price.

In fact, that 10-year average price line has served as a reliable technical resistance and support level. Over the past five years, the price of gasoline has bounced higher both times it fell below $3 (green circled areas in the chart above).

Technically Speaking

If that technical support level holds through this fall and winter, then that presents an investment opportunity. That’s because Wall Street has abandoned the energy sector due to recently enacted import tariffs that threaten to slow down the economy.

The price of gasoline rallied above $3.50 the previous two times it fell below $3. If that happens again, then profit margins for oil producers should expand commensurately.

Wall Street is not pricing that possibility into their valuation models. If anything, they are projecting a gradual drop in gasoline prices as the unemployment rate creeps up, and the number of commuters declines proportionately.

Hence, the aforementioned investment opportunity. When the price of gasoline rises, so too do the share prices of the companies that sell it.

Extreme Movements

The simplest way to participate in a sudden rise in gasoline prices is by owning shares of a sector fund such as the Vanguard Energy ETF (NYSE: VDE). Its top three holdings, Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), and ConocoPhillips (NYSE: COP), account for roughly 45 percent of its total assets.

So far this year (through 9/23), VDE has gained nearly 3 percent. That pales in comparison to the 13 percent return posted by the SPDR S&P 500 ETF (NYSE: SPY) over the same span.

That also makes energy one of the poorest performing sectors of the S&P 500 this year. Last year, it finished 9^th out of the 11 sectors. The year before that, it came in second-to-last.

There is some recent historical precedent to suggest this trend may soon reverse. In 2014 and 2015, energy was the worst performing sector of the index. The following year it finished first.

From 2018 through 2020, energy was once again the worst performing of all the sectors. It finished first the next two years.

Data Dependent

So far, the options market expects oil prices to stay where they are. At the start of this week while VDE was trading near $127, the call option that expires in six months at that strike price could be purchased for $8.

For that trade to be profitable, VDE must rise more than 6 percent by March 20. That implies 12 percent annual appreciation, which is in line with the sector’s long-term historical performance.

There is another consideration regarding energy prices that isn’t yet getting much attention. That is rapidly escalating demand for large data processing centers to accommodate artificial intelligence (AI).

In the communities where those data centers are located, they are putting a strain on the local electric utility grid. Those utilities must ramp up their generating capacity quickly, and the most readily available fuel to do that is natural gas.

The big oil companies that dominate the sector are also some of the biggest producers of natural gas. Even if the price of oil remains flat, natural gas prices could escalate quickly as more data centers come online. Everybody wins.