Nov 10, 2020
⛽ Your Guide To Investing In RBOB Gasoline, The Liquid That Fuels Your Car
Brief Background
RBOB gasoline (Reformulated Blendstock for Oxygenate Blending) is just the more technical (& trading) term for the petrol/gasoline/gas for your car, truck, motorbike, etc. It’s one of the liquids refined from crude oil, making up almost half of all other crude oil products that gets distilled/refined. Fun fact: a 42-gallon barrel of crude oil produces 45 gallons of distilled & refined products. Sort of how popcorn kernels are smaller and denser before popping.
What Can It Do For You
🧺 Portfolio Diversification. Bundling up gasoline with other commodities can be a good way to achieve portfolio diversification. Like crude oil, it’s an energy commodity, and so it tends to move differently compared to other asset classes like stocks and bonds, and even other types of commodities.
💰 Profit. Similar to the oil market, gasoline is also pretty volatile, as you can see from the price charts below. Gasoline prices tend to just represent a premium to crude oil prices and are highly correlated, since under normal circumstances, refineries just add operating costs to the cost of crude oil. However, there are times when unexpected events may occur and so crude oil & gasoline prices may diverge slightly. Saying that though, it also tends to correct itself soon after. In short, risk is very high since unexpected factors can swing its price, but with it, comes the opportunity to make lucrative profits, if you know what factors to look out for.
What Affects RBOB Gasoline Prices
Gasoline prices move similarly to how oil moves. Knowing what moves the price of gasoline can help you understand the current situation.
- 🛢️ Crude Oil Prices. This one is pretty straight-forward. Since gasoline is derived from crude oil, oil prices have a big impact on gasoline prices. Check back to our crude oil article for more info on what drives oil prices.
- 💸 Refinery Operating Costs. This includes things like refining, distribution, and other additional costs:
🏭 Refining. The cost of operating the refineries are added to the price of gasoline.
🚚 Distribution. The costs of transporting gasoline to terminals, and then to gas pumps, can also be added to the price.
⚖️ Emissions Regulations. In some places, refiners have to add ethanol with gasoline to reduce harmful emissions. Adding ethanol may mean more costs, and therefore higher prices.
- 🗺️ Global Demand. Similar to crude oil, demand for gasoline is global, especially in emerging economies where improved economic conditions may mean more vehicles are on the roads.
- ⚡ Disruptive Global Events. Disruptive events like war, conflict, and a pandemic can affect and disrupt global supply & demand dynamics. These events create uncertainty regarding gasoline supply/production, or drive down global demand.
- 🌩️ Weather. Weather can definitely the price of gasoline. Adverse weather conditions can damage oil pipelines connected to refineries, potentially delaying shipments & reducing supply. Weather can also impact demand. Cold winters may mean lower prices since people stay indoors. Just before peak driving season in the summer, prices may rise.
- 🔋 Advancements In Alternatives. Further developments & increased mass adoption in electric vehicles can mean reduced demand for gasoline.
📉💸 When Oil Went Negative, Why Couldn’t I Get Free Gasoline At The Pump?
There are a couple of reasons here. First, you can’t really put raw crude oil in you car. Refineries are needed to distill and refine crude oil into all of its other products, gasoline included. Like any other business, they need to be able to cover their costs and then pocket some profit from the products they sell. Even though they were able to receive oil for cheap, they also couldn’t sell as much as they did pre-pandemic since no one drove anywhere. So, they needed to charge enough to cover all of their operating costs. Also, investment prices in gasoline are usually different to retail-priced gasoline. This is because a gasoline futures contract deals in wholesale prices for a bulk quantity, usually about 42,000 gallons, or 1,000 barrels. The price you pay at the pump is the retail price, and also includes tax, amongst other costs.
Where Is Demand Coming From?
This one is also pretty straightforward. The main use is transportation, but there are some other uses as well.
- 🚗 Vehicles. Vehicles like cars, light trucks and motorbikes. Also recreational vehicles like RVs, quad bikes, etc.
- 🛩️ Small Aircraft.
- 🛥️ Boats.
- 🧰 Equipment & Tools. Used in industries like farming, forestry, landscaping, construction, etc.
- ⚡ Power Generators & Emergency Power Supply.
The Case For RBOB Gasoline
Since it’s pretty correlated with crude oil, gasoline is also very volatile. High volatility also means lucrative returns on investment. With its cyclical pattern, there are multiple opportunities to enter & exit with profit. Because it’s a global commodity, demand for gasoline is expected to pick up especially in emerging markets. In addition, concerns about limitations on refining capacities to meet this growing demand could result in higher prices. Similar to crude oil, just be wary of further lockdown restrictions that may keep demand low.
The Case Against RBOB Gasoline
Like crude oil, gasoline prices can swing unpredictably at times, and unexpected events (like the pandemic) can result in massive price swings. The uncertainty about the status of the pandemic, including further lockdown restrictions, may further dampen gasoline demand in the near future. With climate change & global warming slowly becoming a main talking point for societies all over the world, people may slowly shift away from petrol-based vehicles to electric vehicles.
Popular Ways To Invest In RBOB Gasoline — Pros/Cons of Each
You can’t really invest in physical gasoline, since you’d probably be paying for consumer-priced gasoline (not wholesale). You’d also have to eventually find a buyer who’s willing to buy from you and not from the pump directly. Nonetheless, there are other official gasoline investment instruments that you can explore. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Gasoline ETFs. Gasoline Exchange-Traded Funds are traded on stock exchanges, so they’re very easy to buy and sell. There are a number of options here. You can choose ETFs that only invests in gasoline, or ETFs that bundle up gasoline with other commodities. As usual, whichever ETF you choose, be aware of the fine print — the risks and costs.
- Gasoline Stocks. These are shares of oil-extracting/refining companies. While you will get some exposure to gasoline (& oil) prices, there are times when the company’s stock price and gasoline price diverge, such as events like the BP oil spill. You may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what rigs they have, and potential exploration plans. This option is probably the easiest way to get into gasoline trading.
- Gasoline Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell gasoline at a specified time in the future with an agreed-upon price. Because you are using a significant amount of borrowed money, even small price changes in gasoline can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. A typical contract usually deals with 42,000 gallons of RBOB gasoline. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. Its price pretty much follows crude oil since gasoline is derived from it. So, it’s also a highly volatile and risky investment that can offer lucrative returns. Even so, it’s still a commodity, so adding it to your portfolio and bundling it up with other commodities can help you achieve diversification & lower overall portfolio risk. Just be wary of future developments that can lower its price even further. Keep track of crude oil price drivers since that’s arguably the biggest driver to gasoline prices.
🧺 If you are considering adding gasoline to your portfolio or bundling it with a number of other commodities, you may want to consider doing dollar-cost averaging (regular investments over time) to build your gasoline position so you can take advantage of the volatility in the market.
💰 If you are considering trading gasoline for speculation and profit, you may want to monitor the factors that affect crude oil prices mentioned in the previous article, since that arguably has the biggest impact on gasoline prices. Also, watch out for further lockdown restrictions that may further hamper demand around the world. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on gasoline’s price chart to help consolidate trends and patterns to help with your decision.
As always, if you are unsure, check in with a professional financial advisor before making any moves.
Thank you for reading! Let us know if you found this helpful. You can connect with us @VNewsletters, or check out our website for more information @ vaultcomms.com.
