Why is Gasoline Valuable?
Reformulated Blendstock for Oxygenate Blending (RBOB) gasoline is a fuel product made from refined crude oil. RBOB gasoline often goes by the names gasoline, petro gasoline or petrol.
Edwin Drake, the first American to drill for oil, discovered gasoline by accident when he was distilling oil to make kerosene for heating. Drake considered gasoline a useless byproduct of the distillation process and discarded it. However, after the invention of the automobile in 1892, gasoline became the main source of fuel for cars and light-duty vehicles. This makes gasoline one of the most important and well known commodities in the world.
How is Gasoline Made?
Gasoline production takes place in oil refineries. These industrial facilities separate crude oil, which consists of different hydrocarbons, into smaller component hydrocarbons or fractions.
Each fraction has molecule chains of different lengths, and each of these chains has a different boiling point.
Refineries heat crude oil at temperatures of several hundred degrees and place the boiling liquid into distillation columns called stills. The boiling process produces gasoline as well as other products including kerosene and diesel fuel. Each of these products is recovered at different temperature points.
A typical 42-gallon barrel of crude oil yields 45 gallons of petroleum products. Gasoline represents nearly half of the petroleum products produced, which ranks it as the number one product recovered during the refining process.
The supply of gasoline depends on the availability of both crude oil and refineries. Industry watchers measure refiners by their capacity, which is the amount of crude oil that can go into distillation units.
Oil refiners look at crack spreads when making production decisions.
A crack spread is the difference between the wholesale price of a refined petroleum product such as gasoline and the price of crude oil.
Crack spreads are a way to measure the margins for refining crude products and can serve to predict how tight supply of products is in different markets.
Where is RBOB Gasoline Made?
Top 10 Countries by Gasoline Production
|Rank||Flag||Country||Gasoline Production (Thousand Barrels Per Day)|
Gasoline is the main product made in US oil refineries. Consumers use gasoline for fuel in cars, light trucks and motorcycles as well as recreational vehicles, boats and small aircraft. Gasoline is also used as a fuel in equipment for construction, farming, forestry and landscaping. Electricity generators and emergency power supplies also use gasoline.
What Drives the Price of Gasoline?
Gasoline prices can fluctuate for many reasons, but the most important ones include the following:
- Crude oil prices
- Refining costs and profits
- Distribution and miscellaneous costs
- Seasonal demand
- Political events
- Global demand picture
Crude oil prices
Gasoline derives from refining crude oil, so the price of crude oil has a big impact on its price.
Several factors can impact the global demand for crude oil, but the most important one is overall economic strength. Other factors that impact crude oil pricing include:
- The strength of the US dollar (crude prices generally move in an inverse relationship with the dollar)
- Political events such as decisions by the Organization of the Petroleum Exporting Countries (OPEC) to increase or limit production
- Weather conditions
- Competition from competing energy sources such as solar, hydroelectric and wind power.
Refining costs and profits
The costs of operating refineries and the productivity of those refineries can have a major effect on gasoline prices.
Crude oil varieties and the technology available for refining them can lead to different gasoline products and pricing from one refinery to the next.
Seasonal pollution requirements for gasoline can also create lead to disparities in pricing as can weather-related disruptions to refinery operations.
Distribution and miscellaneous costs
The cost of crude oil and refining it represent the major components of gasoline pricing, but several other miscellaneous factors can affect the final price consumers pay:
- Transporting gasoline from refineries to terminals near gas stations: Farther destinations often translate to higher prices.
- Regulatory requirements: In some markets, gasoline producers must add ethanol to comply with laws.
- Local market economic conditions: Affluent areas often have higher prices than poorer areas.
Gasoline prices show strong seasonal patterns. In the lead-up to summer, prices tend to rise in anticipation of peak driving season. Prices tend to fall in the winter when inclement weather keeps consumers off the roads.
Seasonal patterns also emerge as a result of formulation requirements for gasoline. Environmental regulations in the United States, for example, require gasoline sold in the summer to be less susceptible to evaporation. This requires refiners to substitute more expensive components into gasoline.
Turmoil in important oil-producing countries can create spikes in gasoline prices. In the past, Middle East wars, oil embargos, political coups and acts of terrorism have created fears of supply disruptions and higher prices.
Global demand picture
Increasing demand for gasoline in Asia, Latin America and the Middle East often outpaces supply from those regions. By the same token demand for gasoline has been steadily declining in Europe and the United States. Fluctuations in global demand and how refineries respond to changes in demand can materially affect gasoline prices. New technologies such as electric-powered vehicles, for example, could substantially reduce demand for gasoline.
Reasons to Trade RBOB Gasoline
There are many reasons to trade gasoline, but the best ones include:
Speculate on Oil Demand
Investing in gasoline is a way to express a bullish view on crude oil. If the global economy grows at a strong rate, then eventually there may be an insufficient supply of fossil fuels available to meet demand. Gasoline prices will benefit from these developments.
As emerging market economies grow, their people will purchase more cars and other forms of transportation. This supply/demand imbalance should cause gasoline prices to rise.
Speculate on Political Instability
The OPEC countries are key determinants of the supply of oil available in the global marketplace. Many of these countries have experienced political instability in the recent past. Sometimes this instability has led to questions about the supply of oil. Also, the OPEC countries have often had disagreements with one another about production levels. Such disruptions or instability would likely be bullish for gasoline prices.
Speculate on Global Warming
Destructive weather has the potential to disrupt refinery capacity and raise oil and petroleum prices. If global warming patterns continue, many scientists believe that the United States will experience more intense storms during hurricane season. If these storms shut down refineries, then the United States, the world’s largest consumer of gasoline, will have to seek new sources for petroleum products. Gasoline prices will likely surge under this scenario.
Key Gasoline Trading Considerations
Some suggest the most sensible way to trade gasoline is as part of a larger basket of commodities that includes other energy commodities as well as metals and soft commodities. Buying a basket of commodities protects traders from the swings in any individual commodity’s price.
Commodities such as gasoline have lower correlations with stocks and bonds than individual stocks and bonds do with one another. As a result, trading gasoline provides diversification to a portfolio.
There are two compelling reasons why traders should include gasoline in a basket of commodity investments:
At some point the earth may simply run out of acceptable ways to extract fossil fuels such as crude oil from the earth. Although some suggest fracking and new technologies will fill the void, these technologies are very controversial. Environmental damage and increased earthquake activity near fracking sites may limit their use and create an oil shortfall.
Traders should consider the crucial role that gasoline plays in the global economy. As emerging economies create jobs and industries, the need for automobiles to transport their citizens will grow. Gasoline prices should benefit from this demand.
However, traders should also consider three serious risks associated with investing in gasoline:
Burning gasoline creates pollution and may contribute to global warming. As these concerns intensify, strong competition from greener energy sources might emerge. Electric cars and alternative biofuels are early-stage but growing threats to the gasoline industry.
Because gasoline produces carbon emissions, many countries are finding ways to incentivize less consumption. If countries phase out gasoline or tax it very heavily, then demand could plummet.
Weak economic conditions could cause gasoline and many other commodity prices to suffer.
Expert Opinions on Gasoline
Experts have different opinions about gasoline prices, but there is a consensus that its price is tied to both crude prices and refinery capacity.
In the view of many analysts, growing demand for crude combined with strains on refining capacity could drive gasoline prices higher.
“Demand for distillates such as gasoline is driving higher global demand for crude oil.”
-Janet Kong, Senior Executive, BP
“I do believe that oil production globally has peaked at 85 million barrels. And I’ve been very vocal about it. And what happens? The demand continues to rise. The only way you can possibly kill demand is with price. So the price of oil, gasoline, has to go up to kill the demand. Otherwise, keep the price down, the demand rises.”
-T.Boone Pickens, Founder of Mesa Petroleum
Robert Campbell, head of oil products analysis at Energy Aspects, believes that strong demand for refined oil products is incentivizing refineries to increase their output of products.
How to Trade RBOB Gasoline
Traders have a few direct and indirect ways of investing in gasoline:
RBOB Gasoline Trading Methods Compared
|Method||Complexity Rating (1 = easy, 5 = hard)||Storage Cost||Expiration Date||Management Cost||Leverage||Regulated Exchange|
*Most energy ETFs invest with futures and avoid storage costs.
**Some energy ETFS offer exposure to 2X or 3X the movement in commodity prices.
The New York Mercantile Exchange (NYMEX), a commodities and futures exchange operated by the Chicago Mercantile Exchange (CME), offers a gasoline futures contract that settles into 42,000 gallons of RBOB gasoline per contract. The contract trades globally on the CME Globex electronic trading platform.
Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. Gasoline futures contracts expire on the last business day of the month prior to the delivery month. At expiration, traders must either accept physical delivery of gasoline or roll their positions forward to the next trading month. Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
The NYMEX offers an options contract on gasoline futures. Options are also a derivative instrument that employs leverage to invest in commodities.
As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.
Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of gasoline futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in gasoline futures to profit from their trades. Gasoline options contracts expire three business days prior to the expiration of the underlying futures contract.
These financial instruments trade as shares on exchanges in the same way that stocks do. There is currently only one pure-play gasoline exchange-traded fund (ETF) – United States Gasoline Fund (NYSEARCA: UGA).
In addition, there are many ETFs that invest more broadly in the energy sector including these popular funds:
- PowerShares DB Energy Fund (NYSEARCA: DBE)
- iPath Bloomberg Energy Total Return Sub-Index ETN (NYSEARCA: JJE)
There are many companies engaged in extracting, refining and selling crude oil and crude oil products. These companies are not pure-play investments in gasoline, but the performance of their shares is correlated with crude oil and refined crude products.
Shares of oil companies can also react to other factors including the performance of management and the stock market in general.
|Current Price||Overview||Listings||Founded||Number of Employees||Interesting Fact|
|American multinational oil and gas corporation||New York (NYSE)||1999||80,000+||Largest refiner in the World with a capacity of nearly 6m barrels per day.|
Royal Dutch Shell
|British-Dutch multinational headquartered in The Netherlands||London (LSE), Amsterdam (Euronext), New York (NYSE)||1907||90,000+||Shell have over 40,000 service stations worldwide.|
|US multinational energy corporation||New York (NYSE)||1879||60,000+||One of the successor companies of John D. Rockefeller's Standard Oil|
|French energy multinational||Paris (CAC), New York (NYSE), Amsterdam (Euronext)||1924||100,000+||Total has over 900 subsidiaries covering all areas of energy.|
|Headquartered in London but the USA houses the lion share of its operations||London (LSE), Frankfurt (FWB), New York (NYSE)||1908||74,000+||Burmah Oil Company, the company that eventually became BP, was the first to discover oil in the Middle East.|
|Chinese oil and gas company. Listed arm of state-owned China National Petroleum Corporation||Hong Kong (SEHK)|
New York (NYSE)
|1999||500,000+||China's biggest oil producer.|
|Chinese oil and gas company based in Beijing||Shanghai (SSE), Hong Kong (SEHK), New York (NYSE), London (LSE)||2000||350,000+||Largest oil refiner in Asia.|
Enterprise Products Partners
|Natural gas and oil pipeline company headquartered in Houston, TX.||New York (NYSE)||1968||6,000+||Owns 50,000 miles of pipeline.|
|The world's largest independent pure-play exploration and production company.||New York (NYSE)||1875||12,000+||Conoco Inc. and Phillips Petroleum Co. merged in 2002 then in 2012 spun off its downstream assets as Phillips 66.|
|Italian multinational oil and gas company headquartered in Rome.||Rome (BIT)|
New York (NYSE)
|1953||80,000+||The name "ENI" was initially the acronym of "Ente Nazionale Idrocarburi" which translated is National Hydrocarbons Authority.|
A popular way to invest in gasoline is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on RBOB gasoline prices without purchasing ETFs, futures, options or shares of oil companies. The value of a CFD is the difference between the price of gasoline at the time of purchase and the current price. CFD traders, therefore, have direct economic exposure to the commodity
Many regulated brokers worldwide offer CFDs on gasoline. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to gasoline prices without having to manage complicated futures or options positions.
Plus500 is one of the top brokers in gasoline CFD trading.
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