Will U.S. Drivers "Get their Motors Running " if Gasoline Goes Above $3.00?
Fundamentals
The days of relatively "cheap" Gasoline prices appear to be ending once again, a byproduct of improving economic conditions tied in with curtailed production. Despite attempts by the Chinese government to dampen its surging economy, energy demand remains robust, with China's oil imports in February coming in at the second highest total in its history! Although U.S. energy demand is still well below the levels seen 3 years ago, Oil prices are stubbornly holding near the $80 per barrel level due to Asian demand. Relatively high oil prices and lackluster U.S. gasoline demand has hurt refinery margins to the point where major and minor refiners have curtailed production, which has been hovering near an 80% utilization rate, and have actually shut-down some refineries due to the current economics of producing refined products. This situation could make Gasoline supplies tight going into the summer -- especially if we continue to see some improvement in the employment picture. On Wednesday, the Energy Information Administration (EIA) reported that U.S. Gasoline stockpiles fell by 2.9 million barrels last week to stand at 228,984,000 barrels, as refinery operating rates fell to 80.73%, which is down over 1% in the past week. Although supplies are just over 16 million barrels above last year at this time, supplies should become tighter, because environmental regulations require special gasoline blends for some major population centers in the U.S., which forces refiners to produce these custom blends as summer approaches, which can cause shortages in some areas. It remains to be seen whether U.S. motorists will balk at paying $3.00 plus for gasoline this summer and continue the trend of cutting back on driving that we have seen the past two years, or if improving job prospects and consumer sentiments will bring the public back to the roads, despite higher retail Gasoline prices.
Trading Ideas
Even though gasoline prices are currently trading near their yearly highs, the potential for even higher prices remains -- especially if we continue to see an improvement in the employment situation. Some traders looking for gasoline prices to continue to rise may choose to investigate purchasing a bull call spread in RBOB Gasoline futures options. An example of this trade would be buying the June RBOB 2.35 calls and selling the June RBOB 2.50 calls. With June RBOB futures trading at 2.2663 as of this writing, the spread could be purchased for about 0.0500 points, or $2,100 per spread, not including commissions. The premium paid is the maximum potential loss on the trade, with a potential profit of $6,300 minus the premium paid should June RBOB be trading above 2.50 at option expiration in late May.
Technicals
Looking at the daily continuation chart for RBOB gasoline futures, we notice the bullish trend in gasoline prices began at the end of December of 2008. Since that time, we have made higher highs and higher lows, with prices failing to close below the 200-day moving average since May of 2009. Even though futures prices are up sharply from the Dec '08 lows, we have barely recovered 50% of the decline from all-time high prices made in July of 2008! The 14-day RSI remains strong, but has moved slightly below overbought levels with a current reading of 65.78. Near-term support for May RBOB is seen at the recent lows made on February 25th at 2.1330, with resistance seen near the 2.3500 area.
Mike Zarembski, Senior Commodity Analyst
