Buying Gasoline Call Options to Profit from a Rise in Gasoline Prices

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3 Reasons Why Traders Might Consider RBOB Gasoline In 2020

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Last Updated on August 16, 2020

3 Reasons to Trade RBOB Gasoline

There are many reasons to trade gasoline, but the best ones include:

Speculating 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, people will purchase more cars and other forms of transportation. This supply/demand imbalance should cause gasoline prices to rise.

Is Political Instability Bullish for Gasoline Prices?

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.

How Will Global Warming Affect Gasoline Prices?

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.

What Should You Consider When Trading Gasoline?

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:

Peak Oil

At some point, 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.

Global Growth

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.

Growth in demand for gasoline across the World economy may lead to price increases.

What Are the Risks of Trading Gasoline?

However, traders should also consider three serious risks associated with investing in gasoline:

Environmental Concerns

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 are growing threats to the gasoline industry.

Regulation

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.

Global Recession

Weak economic conditions could cause gasoline and many other commodity prices to suffer.

What Do the Experts Think About 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

T.Boone Pickens on BusinessInsider. Via YouTube

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
Gasoline Futures 5 NO YES NO YES YES
Gasoline Options 5 NO YES NO YES YES
Gasoline ETFs 2 NO* NO YES NO** YES
Gasoline Shares 2 NO NO NO YES YES
Gasoline CFDs 3 NO NO NO YES YES

*Most energy ETFs invest with futures and avoid storage costs.

**Some energy ETFs offer exposure to 2X or 3X the movement in commodity prices.

Gasoline Futures

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.

Gasoline Options

The NYMEX offers an options contract on gasoline futures. Options are also a derivative instrument that employ 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.

Gasoline ETFs

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).

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In addition, there are many ETFs that invest more broadly in the energy sector, including these popular funds:

Gasoline Shares

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.

ExxonMobil

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.

Chevron Corporation
US multinational energy corporation New York (NYSE) 1879 60,000+ One of the successor companies of John D. Rockefeller’s Standard Oil

Total SA

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.

Petrochina
Chinese oil and gas company. Listed arm of state-owned China National Petroleum Corporation Hong Kong (SEHK)
Shanghai (SSE)
New York (NYSE)
1999 500,000+ China’s biggest oil producer.

Sinopec

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.

Conoco Phillips
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 2020 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.

Gasoline CFDs

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 traders can have exposure to gasoline prices without having to manage complicated futures or options positions.

We’ve reviewed and ranked dozens of CFD brokers based on 10 key criteria such as fees, functionality and security (see full list).

Plus500 is one of the top brokers in gasoline CFD trading. 76.4% of retail CFD accounts lose money.

How to locate gasoline CFDs on the Plus500 platform – Illustrative prices only.

Example Trade – Not a recommendation.

How to open a gasoline CFD position on the Plus500 platform – Illustrative prices only.

How to close a gasoline CFD position on the Plus500 platform – Illustrative prices only.

  • No commission on trades (other charges may apply)
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  • Trade gasoline and hundreds of other markets
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

Start Trading at Plus500.com 76.4% of retail CFD accounts lose money.

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  • Trade gasoline and hundreds of other CFDs
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Why You Can’t Influence Gas Prices

Every time gas prices take a jump, we hear many people around us railing at the big oil companies. Rapacious monsters that they are, they’re surely responsible for the high price of gasoline and are raping consumers to reap unfair and excessive profits.

Below you’ll see a recent chain email that blames big oil for high gas prices. But if we take the principles of free market economics into account, it becomes clear that the author of this email suffers from a woeful lack of understanding when it comes to basic economics. If you slept through Economics 101, it’s time to wake up and understand the factors that are really driving prices at the gas pump.

Gas Prices and Oil Companies

Chain-Email Excerpt:
WE CAN GET GAS BACK DOWN TO $1 PER GALLON!
Now that the oil companies and the OPEC nations have conditioned us to think that any drop in the cost of a gallon of gas is a DEAL, we need to take aggressive action to teach them that BUYERS control the marketplace, not sellers.
We can do that WITHOUT hurting ourselves. How? Because we all rely on our cars, we can’t just stop buying gas, but we CAN have an impact on gas prices if we all act together to force a PRICE WAR.
Here’s the idea: For the rest of this year, DON’T purchase ANY gasoline from the two biggest companies. If they are not selling any gas, they will be inclined to reduce their prices. If they reduce their prices, the other companies will have to follow suit. But to have an impact, we need to reach literally millions of gas buyers. It\’s really simple to do.
Join the resistance!

Why This Email Fails Econ 101

The author of this email text asserts and implies several things; we’ll analyze each of them in an economic context in the next section. First, let’s identify the email’s assumptions:

  1. Buyers control a marketplace, not sellers (in other words, buyers alone can control the price of a good or at least buyers have more control over prices than sellers).
  2. Consumers can boycott one oil company without creating increased demand at other oil companies.
  3. There is no wholesale level pricing and distribution in gasoline markets.
  4. Integrated oil companies are all in league with OPEC (the Organization of Petroleum Exporting Countries).
  5. A “price war” is not something that does not continuously happen between competitors in a free-market economy.
  6. It’s unfair that oil companies should make so much money.

Back to the Basics of Economics

Now let’s analyze each of the author’s propositions taking the basics of economics into account.

1. Buyers have more control over prices than sellers: False.

The price of gasoline is not and cannot be determined by buyers alone. The price of gasoline (like any good) is a function of both supply and demand.

This fundamental economic principle is worth a quick review. Figure 1 demonstrates how both supply and demand determine the equilibrium price for a good. Note the following:

  1. The graph’s axes are Price and Quantity. The slope of the supply and demand lines (curves) show the amount of a good that will be supplied and demanded at a certain price. The intersection of the lines establishes a market clearing equilibrium price (Equilibrium 1 on the graph).
  2. If the demand for a good increases (the demand curve shifts to the right, D1 to D2), and supply remains the same, the price of the good will rise (P1).
  3. When the price of a good increases, suppliers have incentive to produce more of that good, and the supply curve shifts to the right (S1 to S2). This increase in supply establishes a new equilibrium price at an overall higher quantity of goods sold (Q1 to Q2)

In the context of the gas price email, buyers do not control the price of gasoline any more than sellers do. The market will always find an equilibrium price established by the levels of both supply and demand.

2. Consumers can boycott one oil company without creating increased demand (and prices) at other oil companies. False.

The email proposes nothing more than shifting demand from one oil company to another. In the short term, this may very well decreases prices at the larger companies, but it will also increase prices at the other oil companies as the demand for their products increases. The economic laws of supply and demand and equilibrium pricing apply to individual companies and gas stations as well as to the entire market. Therefore, regardless of whether the big oil gas station across the street lowers its prices as result of lower demand, Station X will not decrease its prices as the email postulates because the demand for Station X’s products has just increased.

3. There is no wholesale level pricing and distribution in gasoline markets. False.

The proposition in the email does not change the aggregate level of demand in the marketplace, it simply shifts demand from one company to the next. In the long run, the larger company would sell its surplus supply (as a result of the decline in demand for its products) in wholesale crude oil and crude oil products markets. The companies experiencing the increase in demand would buy that supply, and compete among themselves to establish an equilibrium price.

There are very well-established and liquid markets for crude oil and oil products, including gasoline. Crude oil and refined products are traded constantly in both physical and futures markets worldwide. The proposition in the email fails to recognize that aggregate demand and supply have not changed and, in the long run, the price of gasoline would end up close to where it started. In the short run, consumers boycotting the large companies would simply hurt themselves by creating higher prices at competing gas stations.

4. Integrated oil companies are all in league with Organization of Petroleum Exporting Countries (OPEC). False.

Many people believe that oil companies have influence over the decision process at OPEC, the organization that attempts to control the supply of oil, and therefore the price, in order to maximize its members’ profits.

Within OPEC, each member nation is allocated a production quota. International oil companies operate independently of OPEC, but because OPEC controls a larger percentage of world crude oil exports (supply not consumed by the producing nation), OPEC’s policies impact the price of oil worldwide. As demonstrated in the illustration above, if the demand for a good increases while supply remains constant, the price of that good will rise (Equilibrium 1 to P1). While oil companies might benefit from OPEC’s supply constraints, they do not participate in OPEC’s decision-making process, and could just as easily be hurt by OPEC’s policies if OPEC (assuming its member nations were able) decided to attempt to increase the supply of oil worldwide.

5. A “price war” does not continuously happen between competitors in a free market economy. False.

The email proposes that buyers should start a price war between competitors. In free market economies, price wars continuously take place between competitors as companies try to maximize profits and drive competitors out of business. Competitive pricing and striving for efficiencies is the grease that lubricates a free market economy. If one company believes it can maximize total profits by lowering its price—which in turn will increase sales, and thereby increase total profits—the strong motivation for profits causes it to do so.

It goes against the laws of human nature and economics to suppose that companies are not constantly trying to outperform their competitors.

6. It’s unfair that oil companies should make so much money. False.

The incentive to earn a profit is what makes a free market economy work. If you take away that incentive, you take away market innovation and efficiency. Without the incentive of making a profit, capital is not put at risk. As such, a “windfall profits tax” on oil companies could lead to a reduction in the amount of gasoline that companies supply, meaning possible shortages for consumers.

If you take away an oil company’s motivation to make large profits, you take away its incentive to make risky investments such as exploring for new crude oil fields and building new refineries. In addition, these large oil companies are publicly traded companies and they operate for the benefit of their shareholder. Anyone is free to buy shares in these public companies – and these investors expect to get a return on their investment.

The Bottom Line

In a free market, supply and demand determine the price of a good. There are really only two options to bring down the price of gasoline: Increase aggregate supply or decrease aggregate demand. If you decide to boycott a large gas company, you’ll only hurt yourself in the short run by paying even higher prices at a competitor’s pump. In the long run, prices will find an equilibrium through demand and supply adjustments at the wholesale level.

FUTURES/OPTIONS; Gasoline Prices Rise Sharply As Inventories Show a Drop

By The Associated Press

    May 2, 1991

Gasoline futures prices shot higher on the New York Mercantile Exchange yesterday on news that United States gasoline inventories fell last week.

Other petroleum futures prices also rose while natural gas futures ended mixed.

Unleaded gasoline futures settled 0.80 cent to 2.22 cents higher, with the contract for delivery in June at 70.83 cents a gallon; light sweet crude-oil futures settled 22 cents to 29 cents higher, with June at $21.25 a barrel; heating oil was 0.08 cent to 0.45 cent higher, with June at 54.27 cents a gallon; natural gas was 0.2 cent lower to 1.1 cents higher, with June at $1.376 for 1,000 cubic feet.

The American Petroleum Institute, an industry tradgrgroup, said in a weekly report late Tuesday that United States gasoline inventories fell by 666,000 barrels, to 204.2 million, during the week ending Friday. That was slightly below the level of 205 million barrels established by the Energy Department as the minimum operating level before shortages could develop.

Michael Roth, vice president of energy securities and futures research at Merrill Lynch, said the sharp drop on Tuesday in gasoline futures prices indicated that the market had expected an increase in gasoline stocks, so the institute’s number was a surprise.

Pork belly futures finished sharply lower on the Chicago Mercantile Exchange in an erratic session that began with bellies surging to four-week highs on heavy buying by speculative funds.

Bellies for May delivery climbed as high as 67.45 cents a pound early in the day in what turned out to be the tail end of a rally started by reports on Monday that South Korea was again buying American pork.

Last week, the South Koreans bought 4.4 million pounds of American pork bellies, the part of a hog from which bacon is made.

Yesterday’s action boiled down to a face-off between big commodity fund managers and the independent speculators known as locals whose rapid-fire trading enhances the liquidity of futures markets.

“The funds came in today and did some very strong buying,” said Dale Benson, livestock and meat analyst with Dean Witter Reynolds Inc., “and the locals were very aggressive sellers into that buying. When the funds stopped buying, the locals continued to sell,”

Bloomberg

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