Summer driving season is upon us and with it the near certainty of the season’s highest gas prices. While most of the country is made to bow to the gas gods and offer up their first born as collateral for the vacation’s expenses, retail futures traders have the rare ability to profit from the situation that leaves their neighbor’s bearing tales of woe. The recent spike in RBOB gasoline occurs just as the reformulated summer blend squeezes through the pipes and leaves the market ready for the next phase of development.
The seasonal peak in unleaded prices has come between mid-March and Memorial Day more frequently than in the past. The last real summer rally in unleaded was 2008 when all commodities rose. While I agree that there are several good Ukrainian reasons to be nervous about shorting unleaded futures, I believe short selling is the play favored by the near-term odds. My primary analytical focus is the interaction of the commercial traders’ net position within the context of current price levels. Commercial traders have sold more than 33,000 forward contracts in the last two weeks. This type of producer hedging typically comes near market tops as you can see on this chart. Furthermore, you can see that commercial long hedge purchases present a strong correlation to the development of market bottoms.
Understanding the seasonality at play here, selling September unleaded futures is probably the way to go. Therefore, we will look to sell September Unleaded futures while placing a protective stop the $1.066 high. Based on the recent shift in commercial momentum and their historical selling patterns, there’s no reason to believe that refiners won’t continue to sell into this rally. Recent years have seen their net short position double their current level. This type of pressure should help keep retail traders in the game as the recent spike in gas prices becomes viewed as an opportunity rather than another rising family expense.