Are Gasoline Prices Set for a Nosedive?

Are Gasoline Prices Set for a Nosedive?
Aug

9

2018

Are Gasoline Prices Set for a Nosedive?

Premium Sniper

While OPEC Steals the Headlines, Heavy 2018 Gasoline Production and a Formidable Seasonal Could Sink Energy Prices in Q4

“A Call Seller’s Ideal”

With so much focus on OPEC as of late, the mainstream Crude Oil narrative may be overlooking the more garden variety fundamentals that can really control prices in these markets.

In our latest interview with TD Ameritrade in July, I stated that OPEC does not wish to destabilize the world economy and thus, would not let crude prices climb much above the mid-70s.

OPEC indeed has the spigots running again. And while they didn’t open as much or as fast as some had hoped (keeping prices somewhat elevated this month), its longer term effect will be to mitigate price.


Unleaded Gasoline has a solid seasonal tendency based on a very simple fundamental.

But that is not why you should sell options in this market in August.

Energy prices could be headed lower this fall. But the reasons for it are a bit more mundane than you might expect. They are the normal seasonal tendencies of the primary crude oil product – Unleaded Gasoline.

Unleaded Gas – The Summer Demand Curve and Price

It is my opinion after 30+ years of trading options that MOST good commodities option sales start with a good seasonal tendency . This does NOT mean every seasonal tendency is a good option sale. But it’s a place to start.

Unleaded Gasoline has a solid seasonal tendency based on a very simple fundamental.

Gasoline demand in the Northern Hemisphere jumps during the warner summer months. Consumers are simply on the road more. Families are taking vacations. It’s called summer “driving season” for a reason.

It is no surprise then that as demand rises, prices at the retail level tend to as well. This is why you often pay more for gas at the pump during the summer months. (National and Local newscasts never tire of interviewing AAA in forecasting summer gas prices.)

man pumping glass

Gasoline demand tends to rise in the warm summer months with more people on the roads.


Wholesale prices, however, tend to peak in the early stages of driving season, largely as a result of distributors acquiring supplies deemed “adequate” to meet summer demand.

Thus, as the seasonal chart below bears out, Gasoline prices often top out somewhere between May and July and then decline into the weaker demand Northern Hemisphere Autumn.

Graph: Gasoline 5 year Seasonal

Unleaded Gasoline prices have historically tended to top in May-July and then trend lower into fall.


This year’s unleaded price appears to be tracking seasonal norms nicely.

But a seasonal tendency is not the only reason to enter a trade. A seasonal with strong fundamental backing makes it an even stronger case. Gasoline fundamentals would seem to back that bearish case this year.

Supplies Running High

As of the latest EIA report, US Gasoline stocks sit at238.997 million barrels (mb), anall time high for this time of year and over 10% above the 15 year average.

EIA Weekly Total Gasoline Stocks Current Year vs. Last Year vs. Average

US Unleaded Gasoline Stocks are at an all time high for this time of year and 10% above the 15 year average.


These high supplies could be the result of a torrid refinery operating rate. As of the same EIA report, refinery capacity stood at 96.7% – near an all time record pace.

EIA Weekly Refinery Operating Rate

US refineries are operating at a torrid pace, churning out gasoline supplies at near record levels.


Ironically, this rapid refinery rate is also partially responsible for higher crude prices earlier in the summer. Turning more crude into gasoline has helped draw down crude supplies, supporting price.

However, as gasoline supplies build and head into the home stretch of driving season this month, we fully expect refineries to begin “letting up on the gas” so to speak. Yet with supplies at records and lower demand season now in sight, its very reasonable to expect gasoline prices to continue to track seasonal norms into the fall.

What about China?

As trade war fears seem to be inserting themselves into every conversation, they rightfully have a place in this one as well. It is almost universally agreed that an all out trade war between the US and China (and others) would hurt the global economy. And while this is not what we anticipate, should it come about, China would likely be hit particularly hard.

In fact, it could be having an effect already. Last month, Chinese crude oil imports hit their lowest level since December 2017. June oil product imports were down 26.5% from last year.

Make no mistake. A trade war would be bearish for both oil and gasoline prices. Thus any unforeseen risk developing from that situation is almost certainly on the bear side of prices.

Conclusion and Strategy

As you may have seen over the past 30-60 days, our broader strategy in the Energy sector is one of taking premium from BOTH sides of this market.

However, with a short term seasonal play backed by some clearly visible fundamentals, selling the call options looks like an appealing “trade within a trade” this month.

January 2019 Crude Oil

GRAPH: January 2019 Crude Oil


Selling the January Crude 82.00 Call Option


For self directed traders, The Sniper would like to suggest selling calls in the unleaded gasoline market. However, as volume is thin in those options, we’ll refer you to the more liquid crude oil options. Traders seeking to take advantage of steady to lower gasoline and crude prices this fall can consider selling the January Crude Oil 82.00 calls for premiums in the $500 neighborhood.

Energy markets can often be tapped year round for cash premium – but only for option writers who know what they are doing. Putting both seasonals and fundamentals in your corner is a good place to start.


For more information on managed option selling portfolios with James Cordier and OptionSellers.com, visit www.OptionSellers.com/Discovery for a Free Investor Information Pack.

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