Unsure Unleaded
Fundamentals
RBOB Gasoline futures are higher for a second consecutive session on stronger equity prices, a weaker USD and supply disruptions in Nigeria. Rebel group MEND claimed responsibility for attacking a major pipeline owned by Shell hours after being offered amnesty by the government. The supply disruption in Africa's largest Crude Oil producing nation caused a buying spurt on the NYMEX's petroleum complex. The Nigerian disruptions have supported prices in recent weeks, as violence in the Niger Delta has picked up significantly. The region produces light, sweet Crude Oil, which is coveted by refiners for its high yields of refined products. The move higher in equity prices offers further support for prices, as it could signal increased demand.
The economic data released this week has been a mixed bag for traders. The sharp increase in durable goods orders was unexpected and extremely positive, as were the final GDP and existing home sales data. On the other hand, new home sales and initial claims are indicating that many analysts were premature in their assessment that the housing market will recover sooner rather than later. As long as the unemployment rate remains high, foreclosure rates figure to remain constant or increase. This could inhibit economic growth in the US, as home values are a barometer of wealth. Consumer spending habits are largely influenced by housing prices and we have seen that Gasoline demand has been far more elastic than previously thought.
As Gasoline demand has tumbled, supplies have increased, which can be seen as bearish for RBOB prices. The bullish demand outlook for commodities may have been premature and the sharp increases in petroleum prices may act as a barrier to an economic recovery. The RBOB contract may find support from the weak refining margins, which have fallen from $16.52 to $9.28 per barrel over the last ten days. This could result in refiners scaling back production until margins widen once again. The price of the Crude Oil contract has risen more sharply than the RBOB contract over the past month. Either the Crude Oil contract will have to fall back or the RBOB will have to rise to protect from supply imbalances. The question that is left for traders is which one of these markets will move to converge with the other?
Trading Ideas
The inconsistancy in both the fundamental and technical data suggests that traders may wish to take on a strategy that would play both sides of the fence, such as a long strangle. Traders may wish to buy the August 2.00 call (RBQ92C) and buy the August 1.80 put (RBQ91.8P) for a combined debit of 0.1200, or $5,040. If filled at the target price, break even points are 2.1200 on the upside and 1.6800 on the downside at expiration. Given the high cost of the trade and the sizable move that is required for the trade to become profitable, traders may choose to exit the put position while holding on to the call on a solid close above 1.9800. Likewise, traders may opt to exit the call while holding onto the put on a solid close below.1.8300.
Technicals
The August RBOB contract has traded below the 20 day moving average for the last week, suggesting a near term high may be in place. If the market is able to turn high and close above the average, it could be seen as bullish near term. Barring this happening, the technical outlook would remain bearish. The pattern on the daily chart has been difficult to read. On one hand, the two large down days on Friday and Monday have been followed by sideways trading, which can be seen as a bear flag. The three day candlestick pattern within the flag can be viewed as a near term bullish reversal. Likewise, the oscillators offer conflicting signals. Momentum has remained flat despite yesterday's up day, which can be seen as bearish. The slow stochastic indicator, however, has crossed over below the 20 percent line, which would be viewed as a bullish signal.
Rob Kurzatkowski, Senior Commodity Analyst
