Trading in the energy commodity space, in particular oil and
gasoline, has seen a rough start to the year on supply/demand
imbalances that are pushing prices down. The signs of a slowdown in
China, the world's second-largest oil consumer, and emerging market
turmoil have added to the woes (read:
3 Energy ETFs with a Choppy Start to 2014
This is particularly true with the
United States Gasoline ETF (
that lost about 6.76% so far this year, much more than the loss of
2.98% for the broad PowerShares DB Energy Fund (
), 5.55% for United States Brent Oil Fund (
) and 2.27% for United States Oil Fund (
Supply is Increasing
U.S. production is growing at a faster clip thanks to shale
formations, and newly tapped oil and gas fields in North Dakota and
Texas. Further, several closed locations are resuming production
across the globe and Canadian oil sands are seeing continues
growth, leading to a supply glut (read:
Play the U.S. Oil Boom with These Energy ETFs
According to the latest report from the EIA, gasoline production
increased nearly 9.2 million barrels per day for the week ending
Additionally, Iran's agreement with the major world powers to curb
its nuclear activities in exchange for softer international
sanctions has finally erased the decade-long tension and enabled
Iran to export more crude, once again helping to send prices lower.
Demand is Falling
Demand for gasoline is falling on the back of a seasonal trend
(severe cold and snowstorms), growing popularity of fuel-efficient
vehicles, and changing consumer habits.
Growing supply for crude is the major reason for the slump in the
gasoline prices. According to the
Energy Information Administration
(EIA), the average gasoline price is expected to fall from $3.51
per gallon in 2013 to $3.46 per gallon in 2014 and further to $3.39
per gallon in 2015.
UGA in Focus
The fund provides investors exposure to front-month gasoline
futures, tracking RBOB gasoline for delivery to the New York harbor
which is traded on the NYMEX.
The ETF is less liquid with daily trading volume of about 21,000
shares, suggesting a wider bid-ask spread. As such, investors may
have to pay extra beyond the annual fee of 60 bps per year. The
fund has managed assets of $53.5 million so far.
As traders need to roll from one future contract to another, the
fund is susceptible to roll yield. The roll yield is positive when
the futures market is in backwardation and negative when the
futures market is in contango.
Basically, if the price of the near month contract is higher than
the next month futures contract, then this is backwardation and the
opposite holds true for contango (read:
Don't Be Fooled by the Gasoline ETF's Rise
Currently, the gasoline market is in contango, which is bearish for
the commodity and the gasoline ETF UGA. However, this situation
might continue at least for the near term and might rebound in May
as the RBOB gasoline futures contract for May is trading higher
than the next month contract (June), signaling positive roll yield.
Given the current bearish fundamentals, we advise investors still
long on gasoline to get out of this weak space or consider a short
play on the product. In fact, the sentiment for the overall energy
commodity market is negative, and there may be better picks out
such as in the agricultural market
, at this time.
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US BRENT OIL FD (BNO): ETF Research Reports
PWRSH-DB EGY FD (DBE): ETF Research Reports
US GAS FUND LP (UGA): ETF Research Reports
US-OIL FUND LP (USO): ETF Research Reports
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