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Gasoline As the 2023 Driving Season Approaches

Barchart - Wed Feb 8, 10:39AM CST
Oil - shutterstock_1245246412

Gasoline futures were trading at $2.65 per gallon wholesale on January 22, when I wrote on Barchart, “While crude oil and gasoline are not likely to return to the 2022 highs, prices above $100 per barrel and $3 per gallon wholesale are possible over the coming months.” 

On February 8, 2023, the nearby March NYMEX RBOB gasoline futures price was lower at $2.4250 per gallon. Chicago ethanol swaps were $2.19 per gallon wholesale in late January and were slightly higher at $2.20 on February 8. 

The futures market tends to be one step ahead of seasonal demand or weakness, and with the 2023 driving season beginning in spring, we could see prices move higher over the coming weeks. 

Higher lows in gasoline futures since mid-December

Inflation and the war in Ukraine caused nearby NYMEX gasoline futures to rise to a record $4.3260 per gallon high in June 2022.

The chart shows the correction from the June high to $2.0204 per gallon wholesale in mid-December 2022. Record sales from the U.S. Strategic Petroleum Reserve and the offseason for gasoline demand during the winter helped gasoline prices fall 53.3% from the all-time peak. 

Long-term bull markets in gasoline and ethanol remain intact 

As the global pandemic gripped markets across all asset classes, gasoline prices plunged to the lowest price since February 1999 in March 2020. 

The chart illustrates the early 2020 spike lower to an over two-decade low around the time NYMEX crude oil futures traded below zero for the first time as storage reached capacity. Since the March 2020 low, gasoline prices have made higher lows, reaching a new record high last year. The bullish long-term trend remains intact despite the 53.3% decline in gasoline prices from the June high to the December 2020 low. 

In the U.S., the government mandates an ethanol blend with gasoline. The mandate reduces reliance on OPEC crude oil and oil products along with benefits for the environment as it lowers emissions.  

The chart highlights higher lows in Chicago ethanol swap prices since the March 2020 80.50 cents per gallon wholesale low. The decline from the November 2021 $3.45 per gallon high to the February 2022 $2.0050 low did not negate the overall bullish trend in biofuel prices. 

Chinese demand could push oil and oil product prices higher 

The leading uncertain factor in 2023 for the oil and oil product markets, including gasoline, is demand from the world’s most populous country with the second-leading economy. China is the top crude oil importer and second in purchases of liquefied natural gas. Fatih Birol, the International Energy Agency’s Executive Director, told Reuters, “We expect about half of the growth in global oil demand this year will come from China.” As China emerges from its COVID-19 protocols, energy demand has increased. Jet fuel demand is soaring as the Chinese begin traveling internationally, and overall crude oil and oil product demand could dramatically increase, causing OPEC to readjust its production policy. 

Gasoline crack spreads remain elevated

Refining companies pass crude oil through a catalytic cracker to process the petroleum into gasoline. Gasoline crack spreads are a real-time indicator of the underlying strength or weakness of crude oil, the main ingredient in the fuel. 

At around the $24 per barrel level on February 8, nearby March NYMEX gasoline crack spreads are around the same level as during February 2022, when they reached a record $61.95 per barrel high. Moreover, at $24 per barrel in February, the gasoline crack is at the highest level during the second month of the year since 2015. The high level of the refining spread is a sign of underlying strength for gasoline and crude oil prices. 

Historical trading patterns point to rising crack spreads and higher gasoline prices as the market moves towards the annual peak driving season during the spring and summer. 

UGA is the gasoline ETF product

The most direct route for a risk position in gasoline is via the futures and futures options on the Chicago Mercantile Exchange’s (CME) NYMEX division. Meanwhile, the U.S. Gasoline Find LP (UGA) provides an alternative for those looking to participate in the gasoline market without venturing into the highly volatile, leveraged, and margined futures arena. At $58.47 on February 8, UGA had $73.97 million in assets under management. UGA trades an average of 38,337 shares daily and charges a 0.96% management fee. 

Gasoline prices fell 53.3% from the June 2022 high to the mid-December 2022 low. At $2.4250 on February 8, gasoline recovered 20% from the late 2022 low. 

The chart illustrates over the same period, UGA fell from $80.29 to $49.22 per share or 38.7%. The most recent recovery to $58.47 per share took UGA 18.8% higher. While the correlation is far from perfect, UGA moves higher and lower with nearby NYMEX gasoline prices. 

The odds favor higher gasoline prices as the 2023 peak driving season approaches. An increase in the demand from China could turbocharge gasoline prices if OPEC does not ramp up supplies. Any price weakness in UGA could present buying opportunities over the coming weeks. 

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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.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.