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Looking to the Futures

Gasoline Futures Bounce on News of Production Cuts

Key Points
  • Exchanges Increase Margin Requirements Amidst Extreme Volatility

Gasoline Futures moved higher Wednesday after hints of possible progress in discussions to curb production of oil between the U.S., Russia, and OPEC. Crude oil and gasoline both made substantial price advances but the near-dated contracts still remain severely depressed as demand erosion dominates the price structure.

May 2020 Gasoline Futures closed Thursday up over $.10 near $.66 per gallon, stabilizing after spiking over 25% to $.75 earlier in the day. Futures prices still linger below the 20, 50, and 200-day moving averages, a condition that has persisted since late February. Looking at farther-out contracts, the December 2020 Gasoline Futures contract is trading near $.83, and the April 2021 contract traded around $1.00 a gallon Thursday morning.    

The vast global energy market’s absorption of the shock of lost demand has hammered energy prices lower, and now attempts to manage the supply side could occur through numerous levers. An obvious reaction could be a reduction in output by the world’s major producers. Stockpiling product into government-controlled emergency stockpiles could occur. But on a broad scale, waiting and hoping for a return to normalcy may be the reality of the current energy market.

Supply

Wednesdays at 10:30 a.m. ET we get data from the Energy Information Administration providing insight into U.S. supplies of gasoline. Gasoline stocks had been hovering around last year’s levels, but the last update showed a surplus of nearly 10 million barrels per day. Supplies for this time of year are at the highest level since 2016.   

Demand

In the short-term, demand seems to be collapsing as consumers wait out the pandemic. U.S. demand from the past four weeks was down about 6% year-over-year. Fresh data may show accelerating demand erosion.

Characteristics of the RBOB Gasoline Futures

RBOB refers to motor gasoline blending components which are intended to be blended with oxygenates to produce finished reformulated motor gasoline.  

With a contract size of 42,000 gallons on the CME’s RBOB Gasoline Futures, a one-penny move in the contract price yields a $420 gain or loss on one contract.

The RBOB Gasoline contract is physically settled at expiration, so investors need to liquidate or roll their futures positions prior to the end of the contract’s lifespan. For details about the expiration of physically delivered futures contracts, call Schwab Futures at 877-280-6040. 

Futures Exchanges Raising Margin Requirements

The unprecedented volatility from the global drop in demand have created chaos for traders in the energy pits. Currently margin requirements for gasoline futures vary depending on the contract’s expiration, with the front contract for May now requiring $9,939, roughly 41% of the contract’s notional value. At this time last year the margin requirements were around 6% of the notional value. Longer-dated contracts like the December 2020 RBOB Gasoline futures, trading near $.8000, have initial margin requirements of $6,864.

Margin requirements are set by the exchanges as a bare minimum performance bond, but when abnormal events occur, the bare minimum isn’t always enough. Using the exchange requirements as a floor, brokerage firms can fine-tune the margin requirements as deemed appropriate.        

Another Option for Gasoline Trading

Not everyone has an appetite the leveraged exposure the futures contracts offer. As an alternative, the thinly traded RBOB Gasoline Futures Options trading is available. Much like stock options, RBOB Gasoline Futures Options can be used to limit risk and reward, fine tune directional exposure, and in general, customize an investment style. Long futures positions can be paired with long puts for protection, or short calls to generate income. Just like the underlying futures contract, the options multiplier is 42,000. Implied volatility for short-dated, near-the-money puts and calls has currently moved to extremely high readings well over 100.    

Technicals May RBOB Gasoline Futures RBK20

Fundamentals seem to dominate the scene in the energy patch, but technicians watching the May 2020 Gasoline Futures may have seen the 14-day RSI breaking above 30 Wednesday as a possible entry point. Hightower observed a positive short-term signal Thursday when the May contract closed over the 9-day and also above the 2nd swing resistance number.

Resistance 2        .8441

Resistance 1         .7452

Pivot                      .6584   

Support 1              .5595

Support 2              .4727

SMA 20 Day         .7496

SMA 50 Day         1.3001

SMA 200 Day      1.6373

RSI 14 Day           36

Contract Specifications

Trading Calendar

Employment Report                                                04/03/2020 8:30 a.m. ET

EIA Crude Oil / Gasoline Report                          04/08/2020 10:30 a.m. ET

EIA Natural Gas Report                                         04/09/2020 10:30 a.m. ET

RBOB Gasoline Futures Options Expiration     04/27/2020

May RBOB Gasoline Futures Last Trade            04/30/2020

 

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

Hedging and protective strategies generally involve additional costs and do not assure a profit or guarantee against trading losses.

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