Gasoline/Crude Oil Spread: Revise Short Sale Parameters

RBOB Gasoline/Crude Oil Spread

In mid-May the September RBOB gasoline/crude oil spread posted a fourteen-month high of nearly $23.00 (premium gasoline). Last Friday the nearest-futures RBOB gasoline/crude oil ratio ended the month at 1.44:1, which was the fourth consecutive monthly close above 1.4:1. This is a record monthly closing streak.

Gasoline Crude Oil ratio monthly

Gasoline Crude Oil ratio monthly

Despite the elevated prices of both the spread and the ratio, history indicates that there’s a very good probability that it will tank this summer. Heck, it could even start this coming Friday if things don’t go as expected at the semi-annual OPEC meeting. But who really knows? All we know is the history of the spread and, therefore, what the most likely outcome is over time.

An initial short sale in this spread was stopped out, but we are willing to take another crack at it if/when the trend reverses in the direction of the mean.   Over time, betting with the odds pays off. Therefore, we continue to stalk the RBOB gasoline/crude oil spread from the short side.

Since it is now June, we are going to give ourselves a little more time and move out from trading in the August spread to the September spread.

The Labor Day spread

In early May, the September RBOB gasoline/crude oil spread surpassed resistance at the late February peak. It then pulled back slightly into the May 11th correction low and rocketed to a new multi-month high from there. The May 11th correction low at $20.29 ended up setting the low for the month. In about five more days, the rising 75-day Moving Average will be around this same area.

September Gasoline Crude Oil spread daily

September Gasoline Crude Oil spread daily

A break below the May low and a close below the 75-day MA for the first time since late January could indicate that the multi-month rally is over. Therefore, we will use a break of the May low as our reentry signal and consider a close below the 75-day MA to be confirmation.

Trade Strategy:

On the hypothetical trade recommendation, the blog will cancel the current order to short the August RBOB gasoline/crude oil spread below the April low of $18.67 and replace it with the following: Sell one 42,000 gallon September RBOB gasoline contract and simultaneously buy one 1,000 barrel September crude oil contract if the spread closes below $20.28. Initially, the spread will be liquidated on a two-consecutive day close 20 cents above the 2015 high that precedes the entry.

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