RBOB Gasoline/Crude Oil Spread: Revise the Short Sale Parameters

RBOB Gasoline/Crude Oil Spread

The September RBOB gasoline/crude oil spread reached a new one and a half year high of $24.52 this morning, putting it just a buck and a half away from the December 3, 2013 contract high of $25.98. Also, today will mark the fifth-consecutive month that the nearest-futures RBOB gasoline/crude oil ratio finishes above 1.4:1. The prior record was three months. As we’ve noted before, previous excursions above 1.4:1 have always been followed by collapses to 1.15:1 or lower. The fact that the gasoline/crude ratio has been elevated so long could indicate that the inevitable reversal is going to be a doozy. The longer it takes, the bigger the break.

During this multi-month rally from the January low, the September RBOB gasoline/crude oil spread has only broken a previous month’s low once. Therefore, the June 22nd pullback low of $21.43, which set the low for the month, is an important near-term price support level.

September Gasoline Crude Oil spread (75-day MA) daily

September Gasoline Crude Oil spread (75-day MA) daily

Furthermore, the spread has closed above the rising 75-day Moving Average every single day for five months straight. The pullback into the early April low (the only time this year that a prior month’s low was breached) ended just above the 75-day MA. If the September RBOB gasoline/crude oil spread makes a two-day close below the 75-day MA for the first time since late January it would signal a bearish trend change. Coincidentally, the 75-day MA should be at or above the June low within a week. Therefore, a two-day close below the 75-day MA will likely be accompanied by a break below the June low. This ‘tag team’ trend change signal could be the catalyst for a major decline. We’ll take it as a green light to get short.

Trade Strategy:

Cancel the current hypothetical order in the September RBOB gasoline/crude oil spread and replace it with a new order to sell one 42,000 gallon September RBOB gasoline contract and simultaneously buy one 1,000 barrel September crude oil contract if the spread makes a two-day close below the rising 75-day MA (currently around $21.10) or a one-day close below the June low of $21.43, whichever occurs first. If filled, the spread will initially be liquidated on a two-consecutive day close 20 cents above the 2015 high that precedes the entry.

 

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