What is the RBOB Brent Crack Spread and how is it Use in Energy Trading?

There isn’t an easy way to invest directly in RBOB gas with stocks or bonds, but you can invest in energy sector stocks and bonds affected by the same economic forces. There are also options for energy-related ETFs focused on oil and natural gas. Whereas buying an RBOB future could cost thousands, shares of ETFs can cost less than $20.

Low Volatility ETFs invest in securities with low volatility characteristics. These funds tend to have relatively stable share prices, and higher than average yields. When it comes to crude consumption, the U.S. uses more than the next four highest consumers combined. It is also important to note that our consumption is roughly twice that of our production, making our nation so dependent on foreign oil. You can use the CME Group website or the Nasdaq website to find the current price of a gallon of RBOB gas.

Prices for RBOB gasoline futures logically have a high degree of correlation with crude oil since gasoline is distilled from crude. Thus, some of the global supply and demand factors for crude oil also apply to RBOB. From an investing perspective, guide to broker-dealer registration RBOB gas is important because it’s the benchmark for gasoline futures. So this may give you some insight into what retail gas prices will be in a few days. There are two components to the profit margin that a refiner can achieve.

First, transportation of this fuel can be expensive, as can the refining process to turn crude into gasoline. The prices of RBOB are directly correlated with crude oil, meaning that they will exhibit significant volatility that may be an attractive trait for many traders. Secondly, investments in gasoline can also be used to hedge against inflation, or simply to make a play on our global addiction to fossil fuels. Gasoline is a vital part of our everyday lives, and there is a strict need to consume no matter what economic conditions may be, making it an attractive investment during all kinds of markets. The weekly chart of the RBOB Brent crack spread shows that at times the crack was as high as $28 dollars per barrel and as low as -$5.5 per barrel.

  1. As a result, around 30% of the U.S. market requires gasoline to be reformulated.
  2. To generate an “apples to apples” comparison, the crack is quoted in US dollars per barrel.
  3. After it is distilled from petroleum, RBOB is blended with ethanol to produce reformulated gasoline.
  4. Say you want to buy an RBOB contract when the price is around $2.30 per gallon.

However, after the invention of the automobile in 1892, gasoline became the main source of fuel for cars and light-duty vehicles. This makes gasoline one of the most important and well-known commodities in the world. Traders venturing into the futures market for the first time need to consider the inherent risks… New technologies such as electric-powered vehicles, for example, could substantially reduce demand for gasoline. This requires refiners to substitute more expensive components into gasoline. California is the largest gasoline-consuming state with over 15 billion gallons consumed every year.

What is the RBOB / Brent Crack Spread?

When the crack spread is negative there is no incentive for refiners to purchase and refine Brent oil. This generally occurs during a recession or Brent oil is artificially buoyed by supply disruptions. When the crack spread is elevated and the price is well above the cost for refiners to convert Brent into RBOB, there is a large incentive to purchase and refine as much crude oil as possible.

Refining Costs and Profits

Gasoline itself was not invented, but rather was discovered as a by-product of the production of kerosene and the refining of crude oil. It was thrust into popularity with the introduction of automobiles, which had the option of using various fuel sources, but ultimately settled upon gasoline for its strong combustion properties. Since then, numerous developments have improved the quality of gasoline as it is refined from crude oil all over the world. Gasoline can be a particularly nasty thorn in a consumer’s side; prices at the pump can wildly fluctuate due to the dramatic price swings of crude over small periods of time. Certain options strategies, like vertical spreads, have predefined profits and losses. Individuals who own a business that is sensitive to gas prices—a trucking company, for example—can use RBOB gas futures as a hedge.

For every three barrels of crude oil refined, approximately two barrels of gasoline can be salvaged. Refining this essential fuel can be done in a variety of ways, with the most popular being forms of “cracking”. Cracking is a process whereby hydrocarbon molecules are broken up by heat and pressure into lighter molecules. There are various forms of this process, including thermal cracking (the most popular) and catalytic cracking. Other production/refining methods include polymerization, alkylation, and isomerization.

The first is the difference between the price of crude oil and the price of gasoline. The second is the difference between the cost to generate gasoline and the price where gasoline can be sold is the profit margin. The cost to generate gasoline is the value of crude oil plus the distillation process.

Gasoline is one of the most widely known and used commodities in the world, primarily utilized for fuels. But its application extends beyond that industry to such uses as paint solvents, among others. Seasonal patterns also emerge as a result of formulation requirements for gasoline. Environmental regulations in the United States, for example, require gasoline sold in the summer to be less susceptible to evaporation.

Factors Affecting Natural Gas Prices

The price for the RBOB gasoline futures contract is quoted in U.S. dollars and cents. The minimum price tick for RBOB is 0.0001, equivalent to a movement of $4.20 for one contract. RBOB Gasoline futures are traded on the Chicago Mercantile Exchange, https://www.day-trading.info/daily-treasury-long-term-rate-data/ with prices quoted in U.S. dollars and cents per gallon under the symbol RB. A single contract represents 42,000 gallons with a minimum fluctuation of $0.0001 per gallon. Listed contracts conduct trading throughout the next 36 consecutive months.

These different chains are blended together in various proportions to provide a consistent product for motor fuel. Here are four important facts for anyone trying to trade the gasoline futures market. Gasoline derives from refining crude oil, so the price of crude oil has a big impact on its price. Consumers use gasoline for fuel in cars, light trucks and motorcycles as well as recreational vehicles, boats and small aircraft. These industrial facilities separate crude oil, which consists of different hydrocarbons, into smaller component hydrocarbons or fractions.

The costs of operating refineries and the productivity of those refineries can have a major effect on gasoline prices. Since both producers of WTI and Brent compete for the same refiners as customers, the spread between the two oils is an important metrics for refiners. WTI https://www.topforexnews.org/brokers/vantage-wealth-management-review-2021/ is quoted on the Chicago Mercantile Exchange for pickup in Cushing Oklahoma. This area is landlocked and therefore requires shipment via pipeline or rail. Brent crude oil is one of several types of light sweet crude oil that serves as the global benchmark for crude oil.

That means you only need 12% of the total investment down to buy the contract on margin. Lawrence Pines is a Princeton University graduate with more than 25 years of experience as an equity and foreign exchange options trader for multinational banks and proprietary trading groups. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives.

Liquids and gases are separated into components by weight and boiling point. The lightest components, such as gasoline rise to the top while the heaviest components, such as residual oil, fall to the bottom. Light components include gasoline, which is condensed from a gas back into a liquid.

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