Gasoline/Crude Oil Spread: Roll from Spring to Summer

Buying More Time

The IMC blog entered a hypothetical short position in the April RBOB gasoline/crude oil spread at $21.59 (premium gasoline) on January 15th.

Over the last two months, the spread has dropped as low as $17.57 and rebounded as high as $23.47.

The ratio between April RBOB gasoline and April crude oil was at 1.69:1 when we entered the spread. Here we are two months later and the ratio is at 1.63:1. It hasn’t changed much.

Now remember, history shows that gasoline is just too expensive whenever the ratio is at 1.4:1 or higher (basis the nearest-futures ratio). So we still like the short side of this trade.

RBOB Gasoline Crude Oil ratio (nearest-futures) monthly

RBOB Gasoline Crude Oil ratio (nearest-futures) monthly

But with the expiration of the April crude oil contract right around the corner, we’re going to have to roll the position into longer-dated contracts.

Thinking About Summer

Spring starts in just a few days!

So we’re going to roll into a summer spread.

Hey, there’s a reason this is called the futures market…

July 2016 RBOB Gasoline Crude Oil spread daily

July 2016 RBOB Gasoline Crude Oil spread daily

The July RBOB gasoline/crude oil spread is currently trading at a discount of about $1.75 to the April spread. Perhaps this is due to the seasonal tendency for the spread to peak in the spring.

However, the July ratio is still at a historically high level of 1.52:1. On its own merit, that makes the July spread a short sale candidate.

Additionally, the July RBOB gasoline/crude oil ratio has nearly completed a Fibonacci .618 retracement of the decline between the January contract high and the February correction low. This is an ideal technical level to get short.

July 2016 RBOB Gasoline Crude Oil ratio daily

July 2016 RBOB Gasoline Crude Oil ratio daily

We’re gonna roll to the July spread here. Once we get a confirmed downtrend and the right setup, we hope to add to the position. We will keep you posted…

Trade Strategy:

For tracking purposes, the blog will liquidate the short position in the April RBOB gasoline/crude oil spread and simultaneously enter a short position in the July RBOB gasoline/crude oil spread at the market-on-close on Tuesday, March 15th. Risk a two-consecutive day close above $23.00.

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