Gasoline Bulls in the Driver's Seat Going into the Summer
Fundamentals
Gasoline futures continue to hover near their highest levels of 2009, as higher Oil prices and lower refinery operating rates have some traders looking at tighter supplies as summer approaches. Poor operating margins have provided little incentive for refiners to ramp-up production so far this year. In addition, weak domestic demand due to the continued economic slump has curtailed Gasoline imports -- especially from Europe. However, some analysts believe that the recent price rise has about run its course. Gasoline bears cite more refineries coming out of seasonal maintenance period, which should bring more production back online. Also, there is no sign that U.S. gasoline demand will improve greatly, as the Energy Information Administration announced that gasoline use had fallen by 1.2% during the 4-week period ending on May 8th. The Memorial Day holiday has been seen as the start of the peak summer driving season in the U.S., and there is much debate regarding whether gasoline demand will climb as consumers lean towards longer weekend driving vacations closer to home, or whether they will postpone vacations entirely. How this plays out could help determine the direction of Gasoline prices going into the 3rd quarter of 2009. Near-term, large speculators have voted in favor of higher gasoline prices, with the most recent Commitment of Traders report showing large non-commercial traders net-long 56,375 contracts as of May 12th. This was up just over 5,000 contracts for the week. However, should Gasoline futures prices begin to top, this long position could add further fuel to any sell-off when the long positions are liquidated. Gasoline inventories are expected to have declined last week, with analysts looking for a draw of 1.4 million barrels ahead of this morning's weekly EIA energy stocks report. This comes after a surprisingly large 4.1 million barrel draw the previous week.
Trading Ideas
RBOB Gasoline futures are currently trading in a backwardation (front month futures contract is trading at a higher price than more deferred contract months) out through the December 2009 contract. This is usually a sign that either near-term demand is strong or supplies are tight. Traders who believe that this will continue throughout the summer may wish to investigate bull spreads in RBOB Gasoline futures. An example of such a trade would be buying the July RBOB futures and selling the October RBOB futures. As of this writing, the July futures were trading at a 0.1542 cent premium to October. Traders with this trade on would want to see the spread widen. Traders should remember that spread trading may not be less risky than holding an outright futures position and that there is a possibility that one month could trade higher while the other month trades lower on the same day.
Technicals
Looking at the daily chart for July RBOB Gasoline, we notice prices holding well above both the 20 and 100-day moving averages. The 14-day RSI is hovering just above overbought territory with a current reading of 70.90. Though momentum is quite strong, there are some concerns that the market is becoming a bit parabolic, which could lead to a sharp sell-off if major liquidation selling comes into the market. The next resistance level is seen at 1.8000 for the July contract with support found at the recent lows of 1.6175.
Mike Zarembski, Senior Commodity Analyst
