From the February 01, 2012 issue of Futures Magazine • Subscribe!

Unleaded gas: Time to floor it

Market Strategy

For commodity investors seeking a market influenced by weather, unleaded gasoline can be one of the most seasonal commodities on the board. Most people know that demand surges in the summer when many U.S. families head for the beach or the amusement park. However, the cyclical factors affecting gasoline prices can be just as pronounced at other times of the year.

In the fall and early winter, demand for gasoline is typically lowest, both at the retail and wholesale level. During the autumn months, refineries will shift production to focus on heating oil and other distillates. As a result, unleaded gasoline production is curbed during this period.

As gasoline demand is typically weaker during the autumn months, this reduced supply effect often is overlooked as price stays focused on weakening demand. But as January approaches, the equation changes.

By December, both gasoline stocks and demand often reach lows for the year. However, in January, distributors begin to restock inventories in anticipation of summer demand season (still five months away). This creates an increase in demand at the wholesale level for gasoline.

The problem is, inventory is in short supply during this time of year. As refineries must often continue to emphasize heating oil production during the heart of winter, making gasoline takes a back seat. It can be two to three months before refineries get completely switched over to full scale gasoline production.

And this is where the opportunity lies. Because when winter wholesale gasoline demand begins to rise, there can be an eight-12 week lag time where supply cannot keep up. In the past, gasoline futures prices have tended to strengthen during this time period — sometimes moderately, sometimes considerably.

Gasoline prices did not enjoy the run that crude prices did during November, instead following a typical autumn price pattern (see “Time to gas up”).

With unleaded gas prices still well below summertime highs, there are many reasons that gasoline could be well supported through the first quarter. They include:

  • More positive economic numbers beginning to trickle out of the U.S. economy: After a series of marginally better employment reports the December Employment Situation Report showed an increase in nonfarm payrolls of 200,000 and the unemployment rate dropping to 8.5%. While not out of the woods the December numbers indicate momentum on the job front.
  • Growing optimism that some kind of workable solution can be eventually applied to Europe. After numerous fits and starts there are sign that Europe is getting its house in order.
  • Growing sanctions against Iran from Europe and the United States: While it is unlikely that an all out oil export ban on Iran would ever be approved by China or Russia, the threat of one will likely keep energy prices supported. China and India get about 11% of their imported crude oil from Iran. In January, Iran announced that is was moving forward with plans to enrich uranium at an underground site. The annoucement will likey increase calls for further sanctions and add to risk premium in crude oil markets.

“Time to gas up,” shows that the March unleaded gasoline futures broke through it 200-day moving average and a significant trendline at the beginning of January.

The 200-day simple moving average, a double top from October and November, the recently broken trendline, the upward trendline from the October low and the fourth quarter double offer a series of support levels all above $2.50.

As the short winter months are upon us, both seasonal and macro-economic factors are favoring unleaded gasoline prices. While a straight long position can be profitable, options can also be utilized to take advantage of the seasonal and technical support. With multiple support levels in place, selling puts is a good play here. As a put seller, of course, you do not require a price rally to make money.

Good premium is still available in the March and April contracts well below the gauntlet of support levels mentioned above.

James Cordier & Michael Gross are authors of “The Complete Guide to Option Selling” 2nd Edition (McGraw-Hill 2009). They are co-portfolio managers of, an investment firm that offers managed option selling portfolios.

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