Every crisis breeds opportunities. This one is no different. Fear overrides all in a crisis. This leads to dislocations that wouldn’t occur normally. Stock futures are limit down as we write this on Sunday night, erasing most of Friday’s huge gains. Nearly all markets are in the midst of a liquidity panic which we believe will rival that of the 2008/2009 financial crisis. Investors are selling everything in their portfolios in a crazed rush to get to cash, including a number of key commodities.
We identified natural gas as one of these bargain-priced commodities in our blog of post of February 25. Unleaded gasoline is another energy commodity that has reached fire-sale status. RBOB gasoline futures are now trading well below $1.00 per gallon. As illustrated in the chart below, gasoline prices this low are very rare and tend not to last.
Data Source: FutureSource
If this chart looks familiar it should. It is very similar to the chart we included in our blog post on natural gas. It is almost as rare for natural gas futures to fall below $2.00 as it is for unleaded gasoline futures to fall below $1.00. The last time RBOB gasoline fell this far below $1.00 per gallon was during the crash of 2008/2009 when traders dumped it for the same reasons as today.
As the chart above illustrates, these abnormally low prices didn’t stick around for long. Summer driving season arrived. Refiners shut down strategic refineries for seasonal “maintenance” and prices popped over 60% by mid-summer. History may not repeat but it often rhymes. We believe the odds favor a bounce much like that of 2009.
Seasonal Premium in Gasoline Is Almost Non-Existent
At the current overnight price of roughly 91 cents per gallon, the July futures contract has eliminated nearly all of what is typically a fairly substantial premium to the April and May futures contracts. This is telling us that the market no longer a pickup in auto traffic during the typically busy summer driving season due to the effects of COVID-19.
Price and premiums tend to peak in June and July but as the table below illustrates, the market has pushed peak-season premiums all the way out to September this year. Still, the September futures price is barely 3 cents per gallon greater than today’s cash price.
Source: RMB Group
Recent data from China – the source of the outbreak – suggests that epidemic which began in the US in late February will last approximately 2 to 3 months, with the worst occurring in North America sometime in late March and early April.
Americans Yearning To Be Free
Americans will be itching to get back on the road if the virus is winding down by summer, especially after having spent the entire spring in self-imposed lockdown. Airlines will probably not have committed to resuming full schedules by then due to logistics of getting their airplanes and ground operations back into service and the public will probably be not ready to risk the large crowds associated with airports. But a road trip? It’s about as American as apple pie.
The most direct way to play for a summer bounce is to buy either July, August or September RBOB gasoline 42,000 gallon futures contracts. The July contract is worth $38,220 at the current price of roughly 91 cents. Each 1 cent move is worth $420.
RMB trading customers wishing to go this route should consider margining each contract with at least $20,000 to reduce the possibility of margin calls. Each futures contract would be worth $63,000 at our $1.50 per gallon target, Conversely, each contract would be worth only $21,000 at 40 cents per gallon making losses possible as well.
Editors’ Note: We normally stick with options but RBOB gasoline option contracts are extremely thin. Sellers have pretty much backed away from the market due to extreme volatility. This makes futures the only game in town right now. We’ll let you know if and when conditions in the options market change.
Please be advised that you need a futures account to trade the markets in this post. The RMB Group has been helping its clientele trade futures and options since 1991. RMB Group brokers are familiar with the option strategies described in this report. Call us toll-free at 800-345-7026 or 312-373-4970 (direct) for more information and/or to open a trading account. Or visit our website at www.rmbgroup.com. Want to know more about trading futures and options? Download our FREE Report, the RMB Group “Short Course in Futures and Options.”
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The RMB Group
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