The Great Gasoline Trade Behind Pump Prices

By Emily Lampert

It’s not summer yet, and gasoline prices have already been making headlines for weeks. That’s bad for drivers, but it’s been great for the smart money crowd.

Some have been making a killing in gasoline futures.

A stepchild of crude oil, gasoline futures are an overlooked area of the oil and gas markets. They don’t usually get the attention of newscasters, but lately they’ve captivated a certain trading audience. Even though people are driving less than they’ve driven in a decade, and even though trading in the CME Group’s crude oil contract has fallen, gasoline futures have been surging. “It is the hot tamale right now in terms of participation,” says Tom Kloza, chief analyst at Oil Price Information Service and who has been tracking news at his blog, speakingofoil.com.

The CFTC’s Commitments of Traders reports, issued every Friday afternoon at 3:30pm eastern, tells the story. If you want to play along at home, what matters are the numbers for what’s called RBOB, short for Refomulated Blendstock for Oxygenate Blending. As of March 6, traders had 390,953 open contracts, representing 390 million barrels of gasoline. That’s up 42% from 274,499 open contracts last November 29.

Kloza calculates there’s a record $13 billion being bet on rising prices. “I don’t know where that money’s coming from, but I think it’s smart money,” he says – or rather,  it’s been smart money until this point.

This money recognized a great trade caused by an obvious in retrospect short-term question about gasoline supplies. Crude oil is pumped from the ground and to refineries, which crack the crude into a number of products including gasoline. But coastal refineries have been under financial pressure as world crude oil prices have risen and gasoline demand has fallen. A number of refineries have closed or said they would sell. Those include Sunoco, which closed a refinery in Marcus Hook, Pennsylvania, and ConocoPhillips , which closed a refinery in Trainer, Pennsylvania. The large Hovensa refinery in the U.S. Virgin Islands, a big supplier of the U.S. east coast, also closed.

It all means there’s less capacity to refine gasoline, particularly the spring/summer blend Americans use to fuel their summer road trips. This has hit the northeast, and it’s hit the New York Mercantile Exchange’s gasoline futures contract, which is tied to the gasoline delivered to New York Harbor.

This potential problem was evident to traders last November, who could also see it had the potential to spark fear. Kloza doesn’t trade futures anymore (he last traded some back in 1979 or so), but he played along with a fantasy trade. He “bought” 100 April RBOB futures trading on Nymex and “sold” 100 April Brent crude futures trading on the IntercontinentalExchange. When he cashed out his fantasy trade recently, he’d net $1 million in fantasy profits. Presumably others in the market have made real money.

It’s probably too late to get it on this great gasoline trade. “I’d be worried right now, or soon, because like any ovation’s it’s going to end and the crowd’s going to sit down,” says Kloza. If you’re really brave or foolish, you could always short gasoline futures. Or just save money and stay home.

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