Gasoline is a vital part of our everyday lives, and there is a strict need to consume no matter what economic conditions may be, making it an attractive investment during all kinds of markets. The weekly chart of the RBOB Brent crack spread shows that at times the crack was as high as $28 dollars per barrel and as low as -$5.5 per barrel. When the crack spread is negative there is no incentive for refiners to purchase and refine Brent oil. This generally occurs during a recession or Brent oil is artificially buoyed by supply disruptions. When the crack spread is elevated and the price is well above the cost for refiners to convert Brent into RBOB, there is a large incentive to purchase and refine as much crude oil as possible.
Crude oil is composed of a number of different hydrocarbons, or long chains of molecules. Longer chains make heavier hydrocarbons, as well as higher boiling points. RBOB’s price is most sensitive to supply-and-demand changes for the commodity.
This requires refiners to substitute more expensive components into gasoline. California is the largest gasoline-consuming state with over 15 billion gallons consumed every year. Low Volatility ETFs invest in securities with low volatility characteristics. These funds tend to have relatively stable share prices, and higher than average yields.
When it comes to crude consumption, the U.S. uses more than the next four highest consumers combined. It is also important to note that our consumption is roughly twice that of our production, making our nation so dependent on foreign oil. You can use the CME Group website or the Nasdaq website to find the current price of a gallon of RBOB gas. 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 pollution requirements for gasoline can also lead to disparities in pricing as can weather-related disruptions to refinery operations. Gasoline is also used as a fuel in equipment for construction, farming, forestry and landscaping. Each fraction has molecule chains of different lengths, and each of these chains has a different boiling point. The spread between Brent and WTI has been as high at $28 per barrel and as low as -$3.6 per barrel.
- Individuals who own a business that is sensitive to gas prices—a trucking company, for example—can use RBOB gas futures as a hedge.
- The RBOB / Brent crack spread describes the difference between the price of RBOB gasoline and the price of Brent crude oil.
- When the spread is elevated there is an incentive for US refiners to purchase WTI over Brent.
- In the past, Middle East wars, oil embargos, political coups and acts of terrorism have created fears of supply disruptions and higher prices.
- WTI is quoted on the Chicago Mercantile Exchange for pickup in Cushing Oklahoma.
Here are four important facts for anyone trying to trade the gasoline futures market. Gasoline derives from refining crude oil, so the price of crude oil has a big impact on its price. Consumers use gasoline for fuel in cars, light trucks and motorcycles as well as recreational vehicles, boats and small aircraft. These industrial facilities separate crude stock market quotes silk lined stainless steel flask oil, which consists of different hydrocarbons, into smaller component hydrocarbons or fractions. Internal combustion engines, like those found in automobiles, burn fuel in controlled processes. The higher the octane rating, the higher the compression rate, with a more efficient fuel capable of a higher output than those with a lower octane rating.
What is the RBOB/ Brent Crack Spread and how is it Use in Energy Trading?
Gasoline can be a particularly nasty thorn in a consumer’s side; prices at the pump can wildly fluctuate due to the dramatic price swings of crude over small periods of time. Certain options strategies, like vertical spreads, have predefined profits and losses. Individuals who own a business that is sensitive to gas prices—a trucking company, for example—can use RBOB gas futures as a hedge.
The boiling process produces gasoline as well as other products including kerosene and diesel fuel. Crack spreads are a way to measure the margins for refining crude products and can serve to predict how tight the supply of products is in different markets. RBOB became the benchmark in the United States largely because of legislation banning gasoline with the chemical MTBE which was found in unleaded gas prior to legislation. MTBE was tied to the pollution of groundwater which threatened the health and safety of humans and wildlife. Since the legislation was introduced in the United States, RBOB futures has even become the new benchmark gasoline futures contract. The margins on calendar spreads are lower because the two contracts have a high degree of correlation and generally move in the same direction.
Oil refineries separate out the different chains by heating the crude oil to different vaporization points, and then distilling the resulting vapors. Gasoline is a mixture of those hydrocarbon chains with boiling points below that of water. These different chains are blended together in various proportions to provide a consistent product for motor fuel.
Role of Refineries
However, one contract might move more than the other due to market conditions. 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.
This type of gasoline is used as the benchmark for gasoline trading on the Chicago Mercantile Exchange. The term “reformulated” describes gasoline that does not have any MTBE “Methyl tert-butyl ether”. Like any other commodity, natural gas is influenced by the forces of supply and demand. The most prolific uses of RBOB gasoline is as fuel for various products such as cars, lawn mowers, generators, pressure washers, and many other common household appliances. Much of the U.S. gasoline supply comes from refineries in the Gulf Coast region.
There are two components to the profit margin that a refiner can achieve. The first is the difference between the price of crude oil and the price of gasoline. The second is the difference between the cost to generate gasoline and the price where gasoline can be sold is the profit margin. The cost to generate gasoline is the value of crude oil plus the distillation process. For every three barrels of crude oil refined, approximately two barrels of gasoline can be salvaged. Refining this essential fuel can be done in a variety of ways, with the most popular being forms of “cracking”.
Using Calendar Spreads and Options for RBOB
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. Refineries heat crude oil at temperatures of several hundred degrees and place the boiling liquid into distillation columns called stills.
Refining Costs and Profits
Brent Crude is extracted from the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes. The Middle East used to have a stranglehold on the top ten producers worldwide, but the U.S. recently surpassed the region’s output. For the most part, this list contains both emerging and frontier markets, which is what makes gas prices so volatile. RBOB is https://www.day-trading.info/a-beginner-s-guide-to-investing-in-stocks/ a “BOB” (before oxygenate blending) because it is formulated for subsequent blending with 10% ethanol to form the final gasoline blend that is marketed to end users. RBOB stands for Reformulated Blendstock for Oxygenate Blending, a component that is used to create reformulated gasoline. As a result, around 30% of the U.S. market requires gasoline to be reformulated.
When the spread is elevated there is an incentive for US refiners to purchase WTI over Brent. An ongoing trade battle between the United States and China https://www.topforexnews.org/investing/9-easy-ways-to-invest-1000/ has magnified the impact of tariffs… Trading in a current delivery month will cease on the last business day of the month preceding the delivery month.