Ultimate Guide To RBOB Gasoline Investing

Gasoline is one of the most widely-known and used commodities worldwide. It is primarily utilized for fuels, but can be also used for various reasons like a solvent to dilute paints. While we refer to the liquid as gasoline here in the states, many other parts of the world know it by the term petrol, or sometimes petrogasoline. From a chemical standpoint, this low-density fuel is very volatile, not only because of its natural makeup, but also because of the numerous additives that can be mixed in. Some of these additives include lead, ethanol, and dye [see also The Guide To The Biggest Companies In Every Major Commodity Sector].

Gasoline itself was not invented, but rather, is a byproduct of the petroleum industry, namely from the production of kerosene and refining of crude oil. It was thrust into popularity with the introduction of automobiles, which had the option of using various fuels sources, but ultimately decided upon gasoline for its strong combustion properties. Since then, numerous ways have been invented to improve the quality of gasoline as it is refined from crude oil all over the world. Gasoline can be a particularly nasty thorn in a consumer’s side, due to prices at the pump being highly volatile as the prices of crude are known for their dramatic price swings over small periods of time.

From an investment standpoint, the term petrol or gasoline, refers to Reformulated Gasoline Blendstock for Oxygen Blending (RBOB), which is simply the term given to unleaded gas futures. Seasonally, gas futures tend to dip in the winter months, November and December, and reach their peaks between April and May. Because the United States is the largest consumer of gasoline, how our nation uses gasoline can have a major impact on global prices [see also Commodity Investing: Physical vs. Futures].

Physical Properties Of RBOB Gasoline

As mentioned above, gasoline is a natural byproduct of crude oil. For every three barrels of crude oil refined, approximately two barrels of gasoline can be salvaged. Refining this essential fuel can be done in a variety of different ways, with the most popular being forms of ‘cracking’. Cracking is a process where hydrocarbon molecules are broken up by heat and pressure, into lighter molecules. There are various forms of this process, including thermal cracking (the most popular), and catalytic cracking. Other production/refining methods include polymerization, alkylation, and isomerization.

One important factor to understand about gasoline is its octane rating. Internal combustion engines, like those found in automobiles, burn fuel in controlled processes. The higher the octane rating, the higher the compression rate, with a more efficient fuel capable of a higher output than those with a lower octane rating. This is the reason why some cars only accept certain kinds of fuel, and why there are price discrepancies among various gas options at the pump [see also Three Mining Companies With Robust Yields].

Due to gasoline’s widespread use, it has come under fire for numerous health and environmental concerns over the last few decades. From a health standpoint, the fuel stores numerous chemicals that are carcinogenic, and can be a danger to the general public if a leak were ever to occur. This means that storage tanks, delivery trucks, and refining plants present the most dangerous threats of the chemical being released into the environment. Aside from its health hazards, gasoline has long been under the gun for contributing to greenhouse gases and global climate change. As the world’s need for energy only increases, many call for alternative energy solutions to displace gasoline, but for the time being, this fuel has a vice-like grip on the global economy, and won’t be going anywhere anytime soon.

Uses Of RBOB Gasoline

The most prolific uses of RBOB gasoline is fuel for various products like cars, lawn mowers, generators, pressure washers, and many other common household appliances. But it can also be used for other things like removing paint or grease, and is even used in numerous pesticides and weed killers [see also Invest Like Jim Rogers With These Three Agriculture Stocks].

RBOB Gasoline Supply And Demand

The statistics for RBOB gasoline are not perfect due to the fact that production and consumption is measured by crude oil rather than gasoline itself. The figures below represent global consumption and production of crude oil, of which gasoline is derived:

Global Crude Oil Production
(Thousand Barrels per Day 2009)
Country Production
1. Russia 9,934
2. Saudi Arabia 9,760
3. United States 9,141
4. Iran 4,177
5. China 3,996
6. Canada 3,294
7. Mexico 3,001
8. United Arab Emirates 2,795
9. Brazil 2,577
10. Kuwait 2,496
Source: Energy Information Administration

The Middle East has a stranglehold on the top ten producers worldwide, but the U.S. and Russia make up a significant portion of the globe’s crude output as well. For the most part, this list contains both emerging and frontier markets, which is what makes gas prices so volatile. Any kind of tensions or trends in these foreign markets translate to spikes or dips in crude prices, which directly correlates to prices seen at the pump [see also Why Commodities Belong In Your Portfolio].

Global Crude Oil Consumption
(Thousand Barrels per Day 2009)
Country Production
1. United States 18,771
2. China 8,324
3. Japan 4,443
4. India 3,110
5. Russia 2,740
6. Brazil 2,522
7. Germany 2,440
8. Saudi Arabia 2,438
9. South Korea 2,185
10. Canada 2,151
Source: Energy Information Administration

When it comes to crude consumption, the U.S. uses more than the next four highest consumers combined. It is also important to note that our consumption is roughly twice that of our production, which is what makes our nation so dependent on foreign oil.

Price Drivers

As a global commodity, the price of gasoline is impacted by a number of factors, and is often subject to significant price swings in a relatively short period of time. The major price drivers of gasoline include:

  • Crude Prices: Gasoline is  a natural byproduct of crude, and is therefore directly tied to the prices and performances of crude. Any swing in the price per barrel of oil will translate to higher prices at the pump, and more of a hassle for consumers who need gas for their daily lives.
  • Geopolitical Concerns: Most of our oil comes from emerging markets, or other nations around the world. This means that political ties to other nations is a key factor in the prices of gasoline, and any global tension can cause a rift in the prices. When even one country cuts off supply, the rest of the world may be at the mercy of just a few names, as seen in the 2011 Libyan Crisis, which shot crude and gas prices up around the world.
  • U.S. Trends: Gasoline is one of the few commodities that is heavily dominated by US demand. We consume the most gasoline in the world, and as such, are the price drivers for the essential fossil fuel. Any trends in the U.S. economy, like public transit improvements or failures, could lead to major swings in gasoline prices as consumers could shift towards, or away from widespread gasoline use.
  • Alternative Fuels: Perhaps the most threatening factor to gasoline is the bad reputation it has amassed over the last few decades. Now, there are numerous organizations dedicated to finding and funding alternative fuels sources. With wind, solar, and nuclear energy ramping up all over the world, gasoline prices could take a hit down the line, if any of these options becomes a more popular, or cost-effective method of producing energy.

Investing In RBOB Gasoline

There are many reasons to invest in RBOB gasoline. First, transportation of this fuel can be expensive, as can be the refining process to turn crude into gasoline. The prices of RBOB are directly correlated with crude oil, meaning that they will exhibit significant volatility which may be an attractive trait for many traders. Investments in gasoline can also be used to hedge against inflation, or simply to make a play on our global addiction to fossil fuels. Gasoline is a vital part of our everyday lives, and there is a strict need to consume no matter what economic conditions may be, which makes this investment attractive during all kinds of markets.

There are many options for investing in this popular commodity, including equities, futures, and exchange traded products.  Below we outline numerous options for gaining exposure to RBOB gasoline:

RBOB Gasoline Futures

RBOB Gasoline futures are traded on the Chicago Mercantile Exchange, with prices quoted in U.S. Dollars and cents per gallon under the symbol RB. A single contract represents 42,000 gallons with a minimum fluctuation of $0.0001 per gallon. Listed contracts conduct trading through out the next 36 consecutive months. All contracts are subject to the rules and regulations of NYMEX.

Trading in a current delivery month will cease on the last business day of the month preceding the delivery month.

RBOB Gasoline Companies

There are numerous companies that afford opportunities to invest in RBOB gasoline. It should be noted that these companies also deal heavily with crude oil, and as such, any investment will be a play on both crude oil and gasoline:

  • Exxon Mobil (XOM)
  • Chevron Corporation (CVX)
  • Royal Dutch Shell (RDS-A)
  • ConocoPhillips (COP)
  • British Petroleum (BP)

RBOB Gasoline ETFs and ETNs

There are several products that offer exposure to RBOB gasoline via ETFs and ETNs. The exchange traded structure offers many advantages for investors looking to invest in commodities. Any investor looking to invest in RBOB futures would normally have to start a futures account, which can be complicated and dangerous. Now, ETPs offer exposure to these futures through a single, exchange-traded, ticker, opening up the world of investing in both RBOB and other commodities alike. Below we outline several exchange traded products and their exposure to RBOB gasoline:

  • United States Gasoline Fund LP (UGA) – 100%
  • PowerShares DB Energy Fund (DBE) – 28.4%
  • iPath DJ-UBS Energy Total Return Sub-IndexSM ETN (JJE) – 11.7%
  • E-TRACS UBS Bloomberg CMCI Energy ETN (UBN) – 9.1%
  • ELEMENTS Rogers Intl Commodity Enrgy ETN (RJN) – 6.8%

Resources On RBOB Gasoline Investing:

Disclosure: Long BP

Global Oil Production

(Thousand Barrels per Day 2009)

Country

Production

1. Russia

9,934

2. Saudi Arabia

9,760

3. United States

9,141

4. Iran

4,177

5. China

3,996

6. Canada

3,294

7. Mexico

3,001

8. United Arab Emirates

2,795

9. Brazil

2,577

10. Kuwait

2,496

Source: Energy Information Administration

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