The Chicago Mercantile Exchange (CME) offers the public a variety of energy products facing the commodity and refined fuel sectors. Among these listings are Reformulated Blendstock for Oxygenate Blending (RBOB) gasoline futures.
Read on to learn more about CME RBOB futures, key market drivers, and how seasonality impacts asset pricing.
What Are RBOB Gasoline Futures?
CME RBOB futures are the world’s leading derivative product facing refined fuels. The RBOB contract is based on the value of unleaded gasoline distillates and is a favored destination for energy speculators and hedgers alike. Here is a look at CME RBOB futures contract specifications:
|Quotation||U.S. dollars and cents per gallon|
|Minimum Tick||$0.0001 per gallon|
|Listings||Monthly contracts listed for the current year and the
next three years and one month
RBOB gasoline futures feature a market depth far less than that of the CME’s benchmark West Texas Intermediate (WTI) crude oil contract. In fact, for September 2021, RBOB futures traded between 140,000 and 240,000 contracts per day.
Comparatively, WTI crude oil regularly topped 1 million in average daily volume (ADV). For active traders, it’s important to understand that the moderate liquidity of RBOB futures can lead to enhanced volatility, disjointed price action, slippage, and wide bid-ask spreads.
Summer Seasonality Is a Key RBOB Market Driver
At its core, gasoline is a derivative of crude oil. The U.S. Energy Information Administration (EIA) estimates that 19 to 20 gallons of refined gasoline are produced from one 42-gallon barrel of crude oil. Given the commodity-refinement relationship between crude oil and gasoline, it stands to reason that the two assets would show a positive pricing correlation. So as the pricing of WTI crude oil goes, so does the price of RBOB gasoline futures.
During the summer months in the Northern Hemisphere (June, July, August), the consumption of both crude oil and gasoline peaks for the year. The factors for this are multifold, including increased highway travel and enhanced economic activity. As a result, RBOB futures prices typically rise during the summer months in concert with the heightened demand. However, it’s important to understand that RBOB gasoline futures have a collection of market drivers exclusive of crude oil:
- Weather: The U.S. Gulf Coast region is a vital hub for the refinement of gasoline. Hurricanes and floods have the potential to derail production and bring chaos to the market.
- USD: Crude oil and gasoline futures are both priced in U.S. dollars, in adherence to the petrodollar system. Subsequently, RBOB futures are sensitive to periods of USD inflation (bullish) or deflation (bearish).
- Outliers: Outliers such as the COVID-19 pandemic can sway gas prices immensely. During the 2020 onset of COVID-19, gasoline consumption fell 14 percent from 2018 levels, which depressed RBOB prices. As expected, summer 2020 posted an average price of $2.07 per gallon, the lowest since 2004. When demand returned, the average price rose to $2.78 per gallon for summer 2021.
Generally, both WTI crude oil and RBOB gasoline see their highest prices of the year during the Northern Hemisphere’s summer months. However, inclement weather, USD performance, and Black Swan events can rapidly derail historical pricing models.
Looking forward, two crucial factors are poised to impact the trading of gasoline futures:
- Green energy policies: Higher taxes on gasoline consumption and restrictive crude oil production policies are potential bullish market drivers.
- Electric vehicles: The electric vehicle market is projected to grow from 4,093 thousand units in 2021 to 34,756 thousand units by 2030. If realized, this would be an annual compounded growth rate of 26.8 percent and a bearish gas market underpinning.
Is the Future Gasoline or Sustainability?
Successful futures traders all have one thing in common: They can adapt to change. For participants in the RBOB market, this means addressing not only the seasons but also the future of the industry.
To learn more about how you can diversify into the arena of sustainable investing, check out our free on-demand webinar “The Future of Sustainable Investing.” You’ll find everything you need to align your financial goals with your ESG values.