In late April, when gasoline prices were over $3.25 per gallon wholesale, I wrote, “While gasoline has declined from the early March all-time high, the medium-term bullish trend continues to point to higher lows and higher highs.” Nearby gasoline futures were sitting at $3.2735 per gallon on April 26.
NYMEX gasoline futures reached a record high of $4.1165 per gallon on June 2. The United States Gasoline ETF (UGA) tracks the price of NYMEX gasoline futures.
A massive rally since the 2020 low
The nearby NMYX gasoline price reached the lowest level since 1999 in March 2020, when it fell to 37.6 cents per gallon wholesale.
The chart shows the ascent of the gasoline futures market that took the price over ten times higher at the May 2022 high. The price was over the $4 level in early June.
We are now in the peak driving season, with US drivers paying the highest price in history to fill their tanks.
Record territory for gasoline prices
Before 2022, the all-time high in NYMEX gasoline futures was in 2008, when the price reached $3.6310 per gallon wholesale.
The long-term chart shows that wholesale gasoline prices rose over the $4 level for the first time in 2022. At the $4.03 level on June 2, the fuel was in record territory, and it could be a matter of time before gasoline is looking way down at the $4 level as a technical support level.
Prices at the pump continue to rise as state taxes take a big bite the higher the price goes
Gasoline prices vary across the US. While some California residents are paying more than $7 per gallon at the pump, the price in other states is on either side of the $5 per gallon level. Transportation from pipelines is a factor, and rising fuel prices increase the cost of moving gasoline supplies to consumer filling stations. However, state taxes play the leading role in price differentials. Gasoline and other fuel taxes vary by state. If state taxes are not enough, the US Federal government charges an excise tax on motor fuels and lubricating oil. In 2022, California has the highest tax rate on gasoline, while Alaska has the lowest.
Worldwide, gasoline is the most expensive in Hong Kong, where a gallon of the fuel goes for over $10. The bullish trend in US gasoline prices could push prices to Hong Kong levels.
Crack spreads say that the demand remains robust at record highs
Crack spreads are the refining margin for processing a barrel of West Texas Intermediate crude oil into gasoline. Before 2022, the all-time high in the gasoline refining spread was in 2013 at $45.40 per barrel. This year, the processing spread blew through that level as a hot knife goes through butter, reaching $58.67 in May. At the $54 level on June 2, the gasoline crack spreads remained in record territory.
Crack spreads are real-time indicators of refinery earnings. However, they also reflect gasoline demand. At the $54 per barrel level, gasoline demand is robust during the US driving season, putting upward pressure on oil prices as petroleum is the input along with the ethanol that creates the RBOB blend. Corn is the primary ingredient in US ethanol production, so higher fuel prices put upward pressure on food prices. Food and fuel have become supply-side problems turbocharging inflation.
The geopolitical issues causing rising food and fuel prices leave the Fed with few tools to address inflation as supply, not demand, is responsible for higher prices.
The bottom line is the high level of gasoline and distillate crack spreads are screaming that higher oil and gasoline prices are on the horizon.
UGA could still have lots of upside
The most direct route for a risk position in gasoline is via the futures and futures options trading on the CME’s NYMEX division. For those looking to participate in the gasoline market without venturing into the futures arena, the United State Gasoline ETF product (UGA) provided an alternative. UGA’s fund summary states:
At the $75.10 level, UGA had $132.583 million in assets under management. UGA trades an average of 106,979 shares each day and charges a 1.02% management fee. Nearby June gasoline futures closed 2021 at the $2.2821 per gallon level. On June 2, they were 77% higher at $4.0388 per gallon.
The chart illustrates the UGA ETF rose from $40.96 to $75.19 per share or 83.6% over the same period. The ETF outperformed the June NYMEX gasoline futures price since December 31, 2021.
NYMEX gasoline futures are sitting in record territory at just over $4 per gallon in May 2022. The price may be looking down at the $4 level as technical support over the coming weeks and months.
