While nearby NYMEX crude oil futures fell 10.73% in 2023, gasoline futures did worse, posting a 15.01% decline. Gasoline demand during winter reaches a seasonal low as the weather conditions inhibit driving. Meanwhile, as the weather improves in spring, drivers increase their activity, leading to the summer vacation season peak, when gasoline demand reaches its annual high.
Refineries begin processing more crude oil into gasoline, anticipating the high spring and summer demand. Over the coming weeks and months, seasonal factors should start to support the gasoline futures market.
The U.S. Gasoline ETF product (UGA) tracks NYMEX gasoline prices higher and lower.
A decline in 2023
NYMEX RBOB gasoline futures declined 15.01% in 2023.
The chart highlights the 2023 drop, but gasoline futures tend to reach a seasonal low in winter. Gasoline probed below the $2 per gallon wholesale level in December before settling at $2.1063.
At $2.1719 per gallon on January 19, gasoline was slightly higher than the end of December 2034 closing level.
Buying in winter, selling in summer
Gasoline’s seasonal price action leads to lows during the coldest months and highs when the weather improves as drivers put more clicks on their odometers.
The chart dating back to the mid-1980s shows the seasonal patterns when gasoline prices extended lower or higher. Over the recent years, lows in 2008, 2016, 2018, 2020, 2021, and 2022 occurred in December through February. Highs in 2008, 2011, 2018, 2022, and 2023 were in the spring and summer.
Therefore, buying gasoline during winter selloffs and selling during peak season spring and summer peaks has been the optimal approach to gasoline futures. However, the forward curve reflects gasoline’s seasonal nature.
The forward NYMEX gasoline curve highlights the seasonal summer premium and winter discounts. Meanwhile, gasoline prices moved over $4 per gallon wholesale in 2022 when the fuel futures reached a record peak. The highest prices on the forward curve through 2026 were below $2.41 per gallon wholesale on January 19.
The bullish case for oil and gasoline in 2024
In January 2024, the offseason for gasoline demand, there are compelling factors that could push crude oil and gasoline prices higher over the coming months, including:
- The demand for gasoline will increase in the coming months as the 2024 driving season approaches.
- Wars in Ukraine and the Middle East support higher oil and oil product prices. Russia is a leading oil producer, and Moscow could continue to use petroleum as an economic weapon against “unfriendly” countries supporting Ukraine. Russia cooperates with OPEC, the international oil cartel, on production policy and quotas. Meanwhile, the escalating conflict in the Middle East could disrupt critical logistical chokepoints in the Straits of Hormuz and the Persian Gulf, causing supply shortages.
- U.S. energy policy is at the center of the stage in the 2024 election. The administration favors a greener path of energy production and consumption. The opposition supports energy independence through drill-baby-drill and frack-baby-frack energy policies. Uncertainty over the election could cause volatility in traditional energy markets throughout this year until the November election.
- China remains a critical factor for global energy demand. If the Chinese economy improves, the demand will increase, putting upward pressure on prices.
Meanwhile, crude oil and oil products will react to any surprises on the economic and geopolitical landscapes. The bifurcation of the world’s nuclear powers increases the odds of sudden surprises that cause price variance.
UGA tacks gasoline futures
The most direct route for a risk position in gasoline is the futures and futures options on the Chicago Mercantile Exchange’s NYMEX division. The U.S. Gasoline ETF product (UGA) moves higher and lower with NYMEX gasoline prices. At $62.95 per share on January 19, UGA had around $88.1 million in assets under management. UGA trades an average of 20,220 shares daily and charges a 0.96% management fee.
A recent rally in February gasoline futures took the price 12.4% higher from $1.9794 on December 13, 2023, to $2.2252 per gallon on December 18.
Over the same period, UGA rose 12.4% from $56.91 to $63.95 per share. The ETF did an excellent job tracking gasoline prices during the recent rally.
Leave plenty of room to add on further declines
Gasoline prices could head a lot higher over the coming months, but plenty of cold weather ahead could push gasoline prices lower. Therefore, any long gasoline or UGA risk position at the current price levels should leave lots of room to add on further declines.
I favor accumulating gasoline during the winter offseason, anticipating the seasonal rally in spring and summer. Meanwhile, the compelling bullish case for traditional energy commodities could mean crude oil, gasoline, and distillate product prices could soar over the coming months because of economic and geopolitical factors. The risk-reward dynamics at around the $2.1719 per gallon level favors the upside over the coming months.
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On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Disclosure Policy here.
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