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Gasoline Could be Best Way to Play Rebound in Oil

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  • The bullish trend lasted over four months
  • An elevator ride lower on March 18
  • Three reasons to buy the dip in oil
  • Moving into the 2021 driving season that looks robust
  • UGA is the gasoline ETF product

From November 2, 2020 through March 8, 2021, every dip in the crude oil futures markets on the NYMEX and ICE had been a buying opportunity. The energy commodity made quite a comeback from one year ago in April 2020 when nearby ICE Brent futures fell to the lowest price of this century at $16 per barrel. Landlocked NYMEX WTI futures plunged to a record negative $40.32 per barrel low on April 2020. While the energy commodity did not remain in negative territory for long, the price fell to a far lower level than even the most bearish analyst thought possible. Since then, any selloff had been a golden buying opportunity. 

Gasoline is the most ubiquitous oil product. The price had risen steadily over the past year, reaching a high of $2.17 per gallon wholesale on the nearby NYMEX futures contract on March 15. After trading to a low of 37.6 cents per gallon in March 2020, gasoline moved to its highest level since July 2018 in mid-March. 

The gasoline price pulled back with crude oil on March 18 as the most significant selling of 2021 and since last spring hit the market like a ton of bricks. With nearby gasoline futures trading below $2 at the end of last week, this could be the perfect time to buy the dip in the energy product. The peak gasoline season is approaching, and demand for the fuel will be robust in 2021 compared to last year. 

The United States Gasoline Fund (UGA) tracks the price of NYMEX gasoline futures.  

The bullish trend lasted over four months

Gasoline prices rallied from early November 2020 through mid-March 2021in almost a straight line.

Source: CQG

The chart highlights the move from 97.02 cents to $2.17 per gallon wholesale during the winter months. The 123.7% rise was even higher than the move in crude oil, which took the price from $33.64 to $67.98 or 102.1% higher. 

The risk of a correction rose with the crude oil and gasoline prices. In April 2020, crude oil hit the lowest price since futures began trading in the early 1980s at negative $40.32 per barrel. The recent high was $108.30 above the bottom. Gasoline futures fell to the lowest price of this century at 37.6 cents. At its most recent higher, gasoline was over 5.7 times higher than its low in March 2020. 

An elevator ride lower on March 18

Gravity hit the oil and gasoline futures markets on March 18.

Source: CQG

Crude oil became a falling knife on March 18 as the price dropped by nearly $5 per barrel and was over $6 lower at the lows of the session. The energy commodity made a lower low at $57.25 on March 23 as selling pressure continued last week.

Source: CQG

May gasoline futures went along for the bearish ride, falling by over 15 cents per gallon on March 18. Gasoline reached a low of $1.8697 on March 23 and recovered to the $1.9720 level at the end of last week as crude oil was back at nearly $61 per barrel on the May futures. 

Crude oil and gasoline took the stairs higher from November through March and an elevator to the downside during the most recent correction. 

Three reasons to buy the dip in oil

It is impossible to call market tops during rallies or bottoms during corrections or bear markets. Prices tend to move higher than fundamentals dictate during bull markets. As we learned on April 20, 2020, when crude oil futures fell below zero for the first time, they can fall to irrational levels during bear markets. 

While we could see lower lows over the coming days and weeks during the current corrections, three compelling reasons lead me to believe that we will eventually see higher highs in the NYMEX futures:

  • The shift in US energy policy will reduce output. Last March, the US was producing a record 13.1 million barrels per day. As of March 19, 2021, the EIA reported that production was at the 11 million bpd level, 16% lower than last year. 
  • OPEC+ left its production quotas unchanged at the most recent meeting, despite the energy commodity’s higher price. Falling US production and substantial restrictions on the cartel members means the supply side crude oil’s fundamental equation has declined.
  • Vaccines are creating herd immunity to COVID-19. Social distancing guidelines will ease, people will return to the workplace. Moreover, they will be taking a long-overdue vacation over the coming months. The fundamental equations’ demand side will rise at a time when the supply side has declined, creating the potential for shortages and higher prices. 

Moving into the 2021 driving season that looks robust

Spring began last week. As of Friday, May 26, over 84 million people in the US have received vaccines. With over one-quarter of the US population already vaccinated, gasoline demand in 2021 will be far higher than in 2020. 

The gasoline crack spread is a real-time indicator of gasoline demand.

Source: CQG

As the monthly chart shows, the gasoline refining spread rose to a high of $24.86 this month, the highest level since May 2018. With the gasoline crack spread, crude oil, and gasoline prices back at pre-pandemic levels and a surge of demand on the horizon, the 2021 driving season is shaping up to be the most robust in years.  

UGA is the gasoline ETF product

After crude oil and gasoline find bottoms, all signs point to higher highs. The most direct route for a risk position in gasoline is via the futures market on the CME’s NYMEX division. For those looking to participate in the gasoline market without venturing into the futures arena, the United States Gasoline Fund (UGA) provides an alternative. UGA has $107.835 million in assets under management and trades an average of over 167,000 shares each day. The ETF charges a 0.75% management fee. The continuous gasoline futures contract rose 123.7% from November 2020 through mid-March 2021.

Over around the same period, UGA moved from $17.23 to $34.68 per share or 101.3%. The lower return in the UGA product resulted from the ETF’s structure that rolls futures contracts as they approach expiration. 

For those looking to buy the dip in the energy sector, gasoline could be the best bet as demand looks robust for the 2021 driving season.  

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The post Gasoline Could be Best Way to Play Rebound in Oil appeared first on ETF Daily News.


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