In my Q2 energy report on Barchart, I highlighted the 5.08% decline in RBOB gasoline futures in Q2 and the 2.69% gain in the energy product since the 2022 closing price. Nearby NYMEX gasoline futures settled at $2.54490 per gallon wholesale on June 30 and moved higher in July and August.
Historically, gasoline prices have typically peaked during summer and declined in fall as the offseason for driving approaches. However, 2023 is no ordinary year for energy commodities as the war in Ukraine continues to rage, and Russia has significant influence with OPEC, the worldwide oil cartel.
Gasoline futures stop short of $3 per gallon wholesale
In late July 2023, the price of nearby RBOB gasoline futures rose to $2.9960 per gallon wholesale, just shy of the $3 level.
The chart highlights the 48.3% rally from the December $2.0204 low to the late July high. At $2.8232 per gallon wholesale on August 18, gasoline prices remain close to the recent peak.
While NYMEX crude oil prices rose to $130.50 at the 2022 high, the highest price since 2008, gasoline futures rose to a record peak last year when the price reached $4.3260 per gallon wholesale, well above the 2008 $3.6310 high.
Seasonal factors could weigh on gasoline
Gasoline is a seasonal energy commodity that tends to rise during spring and summer and decline during fall and winter. As the 2023 summer nears its end, seasonal weakness tends to emerge in a typical year.
Drivers put more clicks on their odometers during summer, the vacation season. Bad weather during the late fall and winter leads to less driving and gasoline consumption.
Meanwhile, 2023 is no ordinary year as the war in Ukraine continues to rage. Russia has been the most influential non-OPEC member since 2016, cooperating with the cartel on production policies and quotas. Over the past years, OPEC’s output has been a function of negotiations between Riyadh, Saudi Arabia, and Moscow. Sanctions on Russia and Russian retaliation using energy and food markets as economic weapons have increased oil and oil product prices. Moreover, U.S. and European energy policy to address climate change supports alternative and renewable fuels while inhibiting fossil fuel production and consumption. The green energy initiatives have handed the pricing power in the oil market back to OPEC and Russia, and the world continues to depend on petroleum and petroleum products for power.
The U.S. SPR remains low- OPEC+ is a bullish factor
In 2022, the war in Ukraine caused oil prices to soar to the highest in fourteen years. The U.S. administration sold unprecedented oil from its Strategic Petroleum Reserve to keep a lid on costs and push them lower. The average sales price was around the $95 per barrel level. NYMEX crude oil dropped from over $130 on the high to below $65 per barrel on the low. In October 2022, the administration said it would replace the sales with purchases when oil prices are between $67 and $72 per barrel. As of August 14, the SPR stood at 348.4 million barrels, the lowest level in four decades and significantly lower than the over 600 million barrels in late 2021. With crude oil above the $80 per barrel level on August 18, the energy commodity is above the administration’s target buying zone. The potential for purchases could put a floor under nearby crude oil futures at the $70 level.
OPEC+ will do everything in its power to keep crude oil prices elevated. Saudi Arabia needs an $80 per barrel price to balance its domestic budget. Moreover, Russia depends on petroleum revenues to fund its war in Ukraine and support its domestic obligations. The administration’s plans to purchase crude oil for the SPR and OPEC+’s mission to keep prices elevated are bullish factors for oil and oil products in August 2023.
The Chinese economy is a critical factor
China is the world’s second-leading economy, with a population on par with India. India and China are significant oil-consuming countries. The economic data from China has been weak. OPEC has cited weak Chinese data as a reason for its production cuts. In July, Saudi Arabia extended its production cuts into September.
Meanwhile, when the Chinese economy begins to recover, it will put additional upward pressure on crude oil prices. China is a leading commodity consumer, and crude oil is no exception. Therefore, economic conditions in China are a crucial factor for the path of least resistance of oil prices.
UGA is the gasoline ETF- Time to take profits?
As the oil and oil product prices head into the fall of 2023, bullish and bearish factors are pulling prices in opposite directions. Seasonality favors a decline in gasoline prices, while geopolitics remains bullish.
Market participants holding long positions in gasoline face a predicament in the current environment. The optimal approach for long risk positions could be a trailing stop to protect profits and capital while commensurately setting reward targets based on higher stop levels.
The United States Gasoline Fund, LP ETF (UGA), tracks NYMEX gasoline prices. At $71.01 per share on August 18, UGA had $78.494 million in assets under management. UGA trades an average of 31,415 shares daily and charges a 0.96% management fee.
Gasoline prices rose 48.3% from the December 2022 low to the July 2023 high.
The chart shows that over the same period, UGA rallied 53.3% from $49.22 to $75.43 per share. UGA is a liquid and effective proxy for gasoline futures.
Risk is always a function of potential rewards. Anyone with a long gasoline position well in funds should remember they are long at the last tick and current market price, not at the original execution price level. Therefore, as the gasoline market moves into the offseason, adjusting risk levels and using a trailing stop to protect profits and capital is prudent.
In a June 26, Barchart article, I wrote, “The many supporting factors suggest that gasoline futures and the UGA still have time to move higher over the coming weeks as the peak demand season is in full swing in late June 2023.” UGA was at the $60.19 per share level on June 26. At $71 per share on August 18, it is an excellent time to reconsider risk levels to protect the profits on any gasoline long positions to reflect seasonal concerns while respecting the geopolitical factors that continue to support higher fossil fuel prices.
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On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.