UGA: Approaching Gulf Coast Storm Reinvigorated The Gasoline Backdrop

About: The United States Gasoline ETF, LP (UGA)
by: Oleum Research

U.S. gasoline storage withdraws for the third consecutive week, whereas cracks continue to reach fresh highs.

Net speculative length on gasoline futures post a healthy advance, following fresh short selling.

The global economic fears fade, as Fed Chairman open the door to potential interest rate cuts, whereas looming Gulf Coast storm is set to disrupt U.S. gasoline supplies, providing robust.

Investment thesis

The appreciation of the United States Gasoline Fund LP (UGA) persist and the upside is not ready to ease, given that gasoline storage continue to deteriorate, net spec bets post healthy advances and approaching Gulf Coast storm will disrupt gasoline refining capacity.

Source: Bloomberg

About UGA – United States Gasoline Fund LP

UGA offers exposure to gasoline prices by holding near-month futures on RBOB gasoline traded on the NYMEX. The ETF is structured as a commodities pool, providing a decent choice to be exposed to gasoline markets. The Fund’s objective is to replicate changes in percentage terms of the price of the Unleaded Gasoline futures contract on the Nymex.

As of today, UGA’s top holdings are as follows and the Fund replicates closely RBOB’s daily performance:

Source: Bloomberg

Source: Nasdaq

Nevertheless, the main downside of UGA is its high concentration on front-month gasoline future contract, which can incur heavy roll costs and its high expense ratio of 1.12%.

Petroleum stocks and cracks

According to the EIA, gasoline stocks withdrawal accelerates on the June 21-28 period, down 0.68% (w/w) to 230.6m barrels. While this third consecutive decrease remains negligible, gasoline seasonality is on a slight decreasing trend, establishing in a marginal surplus of 0.6% or 1 347k barrels compared to the five-year average, while increasing its yearly deficit to 3.8% or 9 049k barrels. Concomitantly, UGA lifted 1.52% (w/w) to $30.7 per share, as declining gasoline storage continue to sustain the complex.

During the week, American gasoline storage declined slightly, down 0.72% (w/w) to 233.2m barrels on the week ending June 14, EIA shows. With this decrease, gasoline seasonality weakens, establishing in a slim surplus of 1.3% or 3 022k barrels (yoy) and accelerates its deficit compared to the 5-year average to 2.8% or 6 819k barrels. In the meantime, UGA advanced 8.54% (w/w) to $30.24 per share, amid improving crude oil pricing.

Source: US Stocks of Crude Oil Report and Petroleum Products – EIA

Nevertheless, over the last 10 years, July remains bearish for gasoline futures and UGA shares, with RBOB pricing declining in average 1.5%, due to the tendency of gasoline stocks to posting slight buildups, up 0.5% and following refining utilization rates reaching the highest monthly pace of the year, 92.01%.

Source: Oleum Research

In addition, the Brent-gasoline crack spread appreciation accelerates over the corresponding period, lifting 21.97% (w/w) to $15.96 per barrels, thanks to enhancing gasoline pricing and stabilizing crude oil markets.

Source: Quandl

On the other hand and in spite of the (w/w) deterioration of the gasoline balance in the U.S., the equilibrium continues to sustain the complex, given the net exporting picture. Indeed, gasoline outflows remained positive for the second consecutive week, even if exports of motor gasoline plunged 40.04% (w/w) to 563k bpd and total gasoline imports decreased slower, down 34.31% (w/w) to 536k bpd.

Furthermore, American net production of gasoline blends also provides tailwinds to the complex and UGA shares, given that the output pace decreased slightly over the week, down 2.61% (w/w) to 10.14m bpd.

Speculative positioning

Source: CFTC

The latest Commitment of Traders report, released by the CFTC, shows that net speculative bets on Nymex gasoline futures dipped moderately on the week ending July 2, down 4.52% (w/w) to 78 552 contracts.

While this decline has been mainly attributable to fresh short selling, up 15.75% (w/w) to 60 699 contracts, it was partly counterbalanced by moderate long accretions, up 3.37% (w/w) to 139 251 contracts. That being said and given that both long and short interest for the gasoline complex climbed considerably over the period, thanks to 12 796 new opened contracts, the sentiment for the blend remains positive bullish for the moment.

Since the beginning of 2019, net spec length on RBOB decreased 5.24% or by 4 345 contracts, whereas UGA YTD performance accelerated, up 32.63% to $31.58 per share.

Fundamental changes

Since our last article, published on June 27, gains in the gasoline complex pursued, propelling UGA 8.4% to $32.78 per share, following a reduction in global economic fears, slashed by strong June job creations, published in last Friday report.

Besides, the Federal Reserve Chairman Jerome Powell acknowledged its concerns about the economic implications of global trade disputes, opening the path to potential interest rate cuts if the economic situation deteriorates.

Also, the storm preparing in the Gulf Coast and expected to gain strength by the end of the week, will disrupt oil refining activity and should have a significant impact on gasoline blending, given that the region account for nearly 2/3 U.S. overall gasoline conversion.

Furthermore, the gasoline future curve edge considerably higher on close by maturities, along with Brent futures, indicating that market participants are still believed that crude and gasoline supply risks persist.

To sum it up, our bullish view remains intact for the moment, as gasoline stocks continue to depreciate, speculative bets on the blend post healthy advances and looming Gulf Coast storm is set to disrupt gasoline refining activity. That being said, we maintain a buy recommendation on UGA shares and we expect that the ETF will overtake its latest resistance level of $33.24 per share.

We look forward to reading your comments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.