RBOB Gasoline/Crude Oil Spread
On April 7th the blog made a hypothetical trade entry on the short side of the August RBOB gasoline/crude oil spread at $20.00 (premium gas). Initially, we are risking a two-consecutive day close above $22.00 (premium gas).
To determine the spread price, we first had to convert the price of gasoline from gallons to barrels. There are 42 gallons in one barrel. The RBOB gasoline futures contract controls 42,000 gallons of gas. Therefore, we multiply the price-per-gallon by 42 to calculate the price-per-barrel.
August RBOB gasoline closed at $1.8248-per-gallon yesterday. This converts to $76.64-per-barrel. August crude oil closed at $56.65-per-barrel yesterday. Therefore, gasoline closed at a premium of $19.99 over the crude oil.
Historically, spreads of $14 or more have normally been followed by declines back to $6 or less. Only the decline into the late December 2014 low missed this target when it bottomed at $6.93, basis the nearest-futures. Therefore, the initial entry at $20 with a trade risk of $2 and the minimum price objective of $6 yields a risk-to-reward ratio of 1:7 on the initial trade attempt. It gets better if some setups materialize for ‘add-on’ opportunities.
After posting a high of $23.58 in late February, the August RBOB gasoline/crude oil spread dropped $3.37 into the March low. It then bounced $1.68. Symmetrically, it would be ideal for the spread to match the initial decline and drop to somewhere around $18.50 before bouncing again. If a bounce of $1.50 or more follows, we may be able to use it as a setup to add to the short position. We will be watching the situation closely.