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(Seth Perlman/AP Photo)
(Seth Perlman/AP Photo)

ETFs

As gasoline prices hit 'sweet spot,' boost your exposure with this ETF Add to ...

Gasoline prices traditionally move higher from the end of January to the end of May. What are prospects this year?

Gasoline prices move higher during their period of seasonal strength mainly because of two annual recurring events. North American refiners switch their production from heating oil into gasoline for the summer driving season. During this period, production temporarily is shut down and inventories drop. In addition, refiners normally complete their annual maintenance during the conversion period. If something is going to go wrong, it usually happens during the annual maintenance period. North American refineries are old and require an increasing amount of maintenance.

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The “sweet spot” for wholesale U.S. gasoline prices is from the end of January to the end of April. The trade has been profitable in 16 of the past 18 periods including nine of the last ten periods. Average gain per period during the past 18 “sweet spots” was 16.8 per cent.

Tip off for timing of the start of “sweet spot” is a seasonal peak in gasoline inventories normally between the last week in January and the second week in February. This year, gasoline inventories peaked in the last week in January.

Prospects for an upside move in gasoline prices this year are above average despite a decline in demand due to the improving fuel efficiency of North American autos. Feedstock for gasoline is crude oil. Crude oil prices already have increased by almost 5 percent since the end of January and established an intermediate uptrend earlier this week. On average, crude oil prices during the past 20 periods from the end of January to the end of April have increased 10 per cent. In addition, a colder-than-average winter will prompt refiners to postpone timing for conversion from heating oil production to gasoline, thereby increasing the possibility of a gasoline shortage this spring.

Look for the average retail price of gasoline in the U.S. to advance from $3.35 (U.S.) to over $3.75 per gallon by the official start of the U.S. driving season on the U.S. Memorial Day holiday near the end of May. An equivalent change in the price of gasoline in Canada is also anticipated. Assuming no change in the Canadian dollar relative to the U.S. dollar, the price of gasoline in the Greater Toronto Area is expected to rise from $1.31 (Cdn) to $1.45 per litre.

On the charts, wholesale gasoline prices at $2.85 (U.S.) per gallon and their related ETF have a positive technical profile.  Yesterday, the ETF broke above resistance on higher than average volume to reach a six month high. Last week, gasoline moved above its 20, 50 and 200-day moving average. Strength relative to the S&P 500 index turned positive at the beginning of February.

A direct way to invest is through the United States Gasoline Fund, LP (UGA), an exchange-traded note based on gasoline futures and short term notes. 

Don and Jon Vialoux are the authors of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. They are also research analysts at Horizons Investment Management, offering research for the Horizons Seasonal Rotation ETF (HAC-T). All of the views expressed herein are their personal views, although they may be reflected in positions or transactions in the various funds managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://TimingTheMarket.ca/ and http://EquityClock.com.

 

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