As of late, NYMEX crude oil futures experienced a 10.73% decline in 2023, but gasoline futures fared worse with a 15.01% drop. Typically, gasoline demand hits a seasonal low during winter due to adverse driving conditions. However, as spring approaches and weather conditions improve, drivers become more active, leading to a peak in gasoline demand during the summer vacation season.
Refineries respond by processing more crude oil into gasoline, anticipating the surge in spring and summer demand. Over the upcoming weeks and months, seasonal factors are expected to lend support to the gasoline futures market.
The U.S. Gasoline ETF (UGA) tracks NYMEX gasoline prices, rising and falling in accordance. Despite the decline in 2023, the current market conditions present an opportunity for potential accumulation.
Reviewing the Decline in 2023
The chart underscores the 2023 decline, a typical occurrence as gasoline futures usually reach a seasonal low in winter. Gasoline dipped below the $2 per gallon wholesale level in December but settled at $2.1063. As of January 19, it stands at $2.1719 per gallon, slightly higher than the closing level at the end of December 2034.
Seasonal Buying and Selling Trends
Gasoline prices historically exhibit seasonal patterns, with lows during the coldest months and highs during improved weather conditions when drivers increase their mileage.
Examining the chart dating back to the mid-1980s, these seasonal patterns are evident, with lows in December through February and highs in spring and summer. Despite this, the forward NYMEX gasoline curve reflects the seasonal nature of gasoline, showcasing summer premiums and winter discounts. Notably, the highest prices on the forward curve through 2026 were below $2.41 per gallon wholesale on January 19.
Bullish Factors for 2024
In January 2024, traditionally an offseason for gasoline demand, several factors could potentially drive crude oil and gasoline prices higher:
Anticipation of increased gasoline demand in the lead-up to the 2024 driving season.
Geopolitical tensions, including conflicts in Ukraine and the Middle East, support higher oil and oil product prices. Russia, a major oil producer, could leverage petroleum as an economic weapon, and Middle East conflicts may disrupt crucial logistical routes, causing supply shortages.
Uncertainty surrounding U.S. energy policy due to the 2024 election, with potential volatility in traditional energy markets until November.
China’s role as a key player in global energy demand, with improvements in the Chinese economy likely leading to increased demand and upward price pressure.
UGA as a Means to Invest in Gasoline
The U.S. Gasoline ETF (UGA) serves as a direct means for a risk position in gasoline, mirroring NYMEX gasoline price movements. As of January 19, UGA was priced at $62.95 per share, with approximately $88.1 million in assets under management. With an average daily trade volume of 20,220 shares and a 0.96% management fee, UGA has proven effective in tracking gasoline prices during recent rallies.
Considering Further Declines and Upside Potential
While gasoline prices could trend higher in the coming months, the possibility of further declines remains due to ongoing cold weather conditions. Therefore, any long positions in gasoline or UGA at current levels should allow flexibility to accumulate more in the event of additional declines. The risk-reward dynamics around the $2.1719 per gallon level favor the upside in the coming months, making it an opportune time for accumulation.
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