For commodities investors seeking a market influenced by the weather outside, unleaded gasoline can be one of the most seasonally affected commodities on the board. Most people know that demand surges in the summer, when US workers and families head for the beach or the amusement park. However, the cyclical factors affecting gasoline prices can be just as pronounced at other times during the year.
In the fall and early winter, demand for gasoline is typically lowest, both at the retail and wholesale level. During the autumn months, refineries will shift production to focus on heating oil and other distillates. As a result, unleaded gasoline production is curbed during this period.
As gasoline demand is typically weaker during the autumn months, this reduced supply effect is often overlooked as price stays focused on weakening demand. But as January approaches, the equation changes.
By December, both gasoline stocks and demand often reach lows for the year. However, in January, distributors begin to restock inventories in anticipation of summer demand season (still 5 months away). This creates an increase in demand at the wholesale level for gasoline.
The problem is, inventory is in short supply during this time of year. As refineries must often continue to emphasize heating oil production during the heart of winter, making gasoline takes a back seat. It can be 2-3 months before refineries get completely switched over to full scale gasoline production.
Come January, gasoline distributors are already preparing for summer driving season.
At this is where the opportunity lies. Because when winter wholesale gasoline demand begins to rise, there can be an 8-12 week lag time where supply cannot keep up. In the past, gasoline futures prices have tended to strengthen during this time period - sometimes moderately, sometimes considerably (Past performance is not indicative of future results).
Gasoline prices did not enjoy the run that crude prices did during November, instead following a typical autumn price pattern.
With prices now at lower levels, there are other reasons that gasoline could be well supported now into Q1 2012. They include:
- More positive economic numbers beginning to trickle out of the US
- Growing optimism that some kind of workable solution can be eventually applied to Europe
- Growing sanctions against Iran from Europe and the US. While it is unlikely that an all out oil export ban on Iran would ever be approved by China or Russia, the threat of one will likely keep energy prices supported. China and India get about 11% of their imported crude oil from Iran.
Conclusion and Strategy
As the calendar year draws to a close, both seasonal and macro-economic factors are now favoring unleaded gasoline prices. We suggest put option sales to you this month - a trade we are currently employing for our managed client accounts. As put seller, of course, you do not require a price rally to make money.
Good premium is still available in the March and April contracts. We advise positioning before year end to make the most of the premiums still available.
Note: The opinions presented here are that of Liberty Trading and not necessarily shared by Optionetics and/or its instructors.
James Cordier & Michael Gross
Contributing Writers, Liberty Trading Group/Optionsellers.com
Optionetics.com ~ Your Options Education Site