RB - US Gasoline Futures to Decline due to Lower ConsumptionNYMEX: RBOB Gasoline Futures ( NYMEX:RB1! )
WTI crude oil futures declined 13.4% since the beginning of the year. It dropped as much as $20 from the mid-January peak of $80 a barrel, before recovering to $64 last week.
In my commentary on February 11th, “Reversal of US Energy Policy Could Push Crude Oil Lower”, I described the main reasons behind the oil market correction:
• US oil production will rise, benefiting from the new energy policy by President Trump as “Drill Baby Drill”
• OPEC+ to increase crude oil production, ending its voluntary production cuts
• Threats of Tariffs could curtail global oil demand
First, on March 31st, the U.S. Energy Information Administration (“EIA”) reported that U.S. field production of crude oil reached 13.146 million barrels per day (mb/pd), up 592 mb/pd or +4.7% from the year-ago level. This is the highest January production level since 1920!
Second, on April 3rd, the OPEC+ members met and decided to end the voluntary production cuts, gradually bringing back 2.2 mb/pd additional supply to the oil market.
Third, Reciprocal Tariff has brought the container shipping industry to its knees. MSC, Maersk, CMA CGM, and Hapag-Lloyd, which ferry goods for retail giants like Walmart, Target, and Home Depot, have seen sharp declines in booking. The tariff uncertainty caused many importers to cancel their orders. This could cause major consequences.
According to Statista, about 71% of the items sold on Amazon were sourced from China. The procurement for Christmas-season products has already begun. Without a US-China trade deal, US consumers could expect fewer gift options at higher prices. Inflation could rebound sooner, as merchants deplete their inventory and face a supply shortage.
This could hurt gasoline demand. On the one hand, higher shopping costs cut into consumer spending budget; on the other, fewer deals at retailers discourage shoppers from taking a trip.
On April 18th, American Automotive Association (“AAA”) reported that national average price for regular gas was $3.182 per gallon, down 14% from the year-ago level.
On April 19th, RBOB gasoline futures quoted $2.0839 per gallon, up 1.8% year-to-date. This contrasts sharply with the down trends in the spot market and the oil futures market.
The April EIA Short-Term Energy Outlook (“STEO”) report states that U.S. retail price for regular gasoline averages $3.10 per gallon in its forecast for this summer (April–September), about 20 cents less than the previous forecast in March. The lower price forecast mostly reflects the expectation of lower crude oil prices. If realized, the forecast gasoline price would be the lowest inflation adjusted summer average price since 2020.
In my opinion, gasoline prices could stay relatively high during the peak summer driving season. After that, Gas prices could turn significantly lower through the end of the year.
Commitment of Traders shows bearish sentiment
The CFTC Commitments of Traders report shows that on April 15th, total Open Interest (OI) for NYMEX RBOB Futures is 418,277 contracts. “Managed Money” (i.e., hedge funds) own 52,114 in Long, 36,615 in Short and 47,628 in Spreading positions.
• While they maintain a long-short ratio of 1.4:1, hedge funds have reduced long positions by 5,198 (-9%) while increasing short positions by 6,021 (+14%).
• This indicates that “Smart Money” is becoming less bullish on gasoline.
Trade Setup with RBOB Futures
If a trader shares a similar view, he could express his opinion by shorting the NYMEX RBOB Gasoline Futures ( CSE:RB ).
RB contracts have a notional value of 42,000 gallons of gasoline oil. With Friday settlement price of $2.0149, each September contract (RBU5) has a notional value of $84,626. Buying or selling one contract requires an initial margin of $5,840.
Hypothetically, a trader shorts September RB contract and RBOB prices drop to $1.90. A short futures position would gain $4,826 (= (2.0149 – 1.90) x $42000). Using the initial margin as a cost base, a theoretical return would be +82.6% (= 4826 / 5840).
The risk of shorting gasoline futures is rising oil and gas prices. Investors could lose part of or all their initial margin. A trader could set a stop loss while establishing his short position. In the above example, the trader could set stop-loss at $2.10 when entering the short order at $2.0149. If gasoline price continues to rise, the maximum loss would be $3,574 ( = (2.10 – 2.0149) *42000).
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
