In a January 19 Barchart article, I highlighted the reasons for accumulating gasoline exposure during the winter. I wrote:
I favor accumulating gasoline during the winter offseason, anticipating the seasonal rally in spring and summer. Meanwhile, the compelling bullish case for traditional energy commodities could mean crude oil, gasoline, and distillate product prices could soar over the coming months because of economic and geopolitical factors. The risk-reward dynamics at around the $2.1719 per gallon level favors the upside over the coming months.
March NYMEX gasoline futures were at just below $2.20 per gallon wholesale in mid-January, and the U.S. Gasoline ETF product (UGA) was $62.95 per share. In late February, prices were higher, with the 2024 driving season coming closer each day.
Oil and gasoline prices rally
Crude oil, the primary ingredient in gasoline, has been rallying since the mid-December 2023 low.
As the chart shows, WTI crude oil for April delivery fell to a $68.57 per barrel low on December 13. The bullish pattern since the late 2023 low took the March WTI futures 12.6% higher to a $77.22 peak on February 26.
The April NYMEX gasoline futures chart shows the 16.3% rally from $2.1950 on December 13, 2023, to $2.5527 per gallon wholesale on February 26, 2024.
UGA moves higher with gasoline
The United States Gasoline ETF (UGA) is a liquid alternative to the futures arena for market participants seeking exposure to the fuel powering most automobiles. At $66.10 per share, UGA had around $100.725 million in assets under management. UGA trades an average of 29,415 shares daily and charges a 0.96% management fee.
As the chart illustrates, during the period when gasoline moved 16.3% higher, UGA rallied 16.1% from $56.91 to $66.10 per share.
Geopolitics supports crude oil and oil products
Seasonality is a power factor for the path of least resistance of gasoline prices as the winter ends and the 2024 peak driving season approaches. However, the most significant issue facing the oil and oil product markets is the war in the Middle East. While Israel continues to fight Hamas after the October 7 attacks, the proxy battles between Iran and the U.S. continue to threaten a substantial escalation. More hostilities in the region could cause sudden upside spikes in oil prices as critical logistical routes in the Persian Gulf and Straits of Hormuz are petroleum chokepoints. Moreover, OPEC+’s mission is the highest possible oil prices, which limits the downside and increases the potential for higher prices in the current geopolitical environment.
The U.S. administration is slowly replenishing the SPR
As of February 16, the United States Strategic Petroleum Reserve stood at 359.6 million barrels and had increased by 700,000 barrels from the previous week. Meanwhile, the U.S. SPR stood at over 600 million barrels in November 2021. After selling an unprecedented number of SPR barrels when crude oil prices spiked to over the $130 level, the administration is now replenishing the reserve.
According to an October 2022 White House Fact Sheet, the Biden administration’s target for replacing the SPY was $67-$72 per barrel. Over the past weeks, the price has been above the top end of the range, but the Department of Energy has been purchasing the energy commodity. With around 250 million barrels left to replace, any price weakness will likely attract buying support from the U.S. administration.
The November 2024 U.S. election will determine energy policy
Between late February and early November 2024, supply and demand fundamentals, the geopolitical landscape, seasonality, OPEC+ output policy, and Chinese economic growth or contraction will determine the path of least resistance for oil prices.
Meanwhile, all bets on oil’s direction could be off after the November 2024 Presidential election. The incumbent Democrats under President Biden favor phasing out reliance on fossil fuels. Republicans support a “drill-baby-drill” and “frack-baby-frack” traditional energy independence policy, making the United States the leading hydrocarbon-producing country. The election will determine if the U.S. continues to depend on other countries for crude oil and oil products, impacting the energy commodities prices.
Over the coming months, seasonality and geopolitics will determine the path of least resistance of oil and gasoline prices. With the 2024 driving season just around the corner, the potential for rising gasoline prices remains high. UGA will move higher and lower with gasoline futures over the coming weeks and months.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
