RBOB gasoline futures are listed on the Chicago Mercantile Exchange (CME) under the futures symbol RB. Although it does not receive as much investor interest as crude oil futures, the contract serves as an essential vehicle for market participants seeking to speculate and hedge in the gasoline market.
Here are four important facts for anyone trying to trade the gasoline futures market.
- Investors can hedge and speculate with RBOB gasoline futures, which are listed on CME under ticker RB.
- RBOB is used to create reformulated gasoline, which is used in about 30% of the U.S. market.
- Since RBOB gasoline futures involve the delivery of 42,000 gallons of gasoline per contract, traders want to close any positions before key delivery dates.
- Some traders prefer calendar spreads rather than long or short futures positions because the risk (and margin requirements) are much less.
- Lastly, options strategies, such as vertical spreads, can be initiated to participate in the next move in gasoline.
1. The Ingredients of Gasoline
Gasoline is produced by refining crude oil. Crude oil is composed of a number of different hydrocarbons, or long chains of molecules. Longer chains make heavier hydrocarbons, as well as higher boiling points.
Oil refineries separate out the different chains by heating the crude oil to different vaporization points, and then distilling the resulting vapors. Gasoline is a mixture of those hydrocarbon chains with boiling points below that of water. These different chains are blended together in various proportions to provide a consistent product for motor fuel.
RBOB stands for Reformulated Blendstock for Oxygenate Blending, a component that is used to create reformulated gasoline. Reformulated gasoline produces less smog than other gasoline blends. As a result, around 30% of the U.S. market requires gasoline to be reformulated.
2. Supply Fuels Gasoline Prices
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.
Still, the RBOB market has its own supply and demand factors. For example, since many of the refineries for gasoline are located in the U.S. Gulf Coast region, weather issues in that area can drive up the price for RBOB. Another important factor to consider is that gasoline is heavily taxed in many jurisdictions. This can also impact demand for RBOB.
3. The Elements of a RBOB Contract
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. The contract unit is for 42,000 gallons or 1,000 barrels. The initial margin to hold one futures contract is $4,460, with a maintenance margin of $4,060, but these margin amounts are subject to modification by the CME based on the volatility of the contract.
The RBOB gasoline futures contract is settled by physical delivery. This means most investors want to liquidate positions prior to the expiration of the contracts. If a position is not liquidated, the holder of a long contract might be responsible for taking delivery of 42,000 gallons of gasoline. It is safe to say that most investors do not want to take physical delivery of that much gas. Thus, investors must be aware of the different deadlines for futures contracts and offset any positions before the risk of delivery comes into play.
Make sure you sell your gasoline futures before the delivery date—otherwise, you might find yourself with a lot of gas!
4. Using Calendar Spreads and Options for RBOB
Leverage can magnify both profits and losses. Alternatively, investors can use futures spreads or calendar spreads, which involve the simultaneous trading of a long futures position in one month and a short futures position in another month (or vice versa).
The margins on calendar spreads are lower because the two contracts have a high degree of correlation and generally move in the same direction. However, one contract might move more than the other due to market conditions. The goal behind the strategy is to profit from changes in the value in one contract relative to the other, although losses are possible when markets across the specific delivery months do not move as anticipated.
Investors can also trade puts and calls on RBOB gasoline futures. Certain options strategies, like vertical spreads, have predefined profits and losses. Importantly, however, RBOB gasoline futures options do not see a great deal of trading activity, and this lack of liquidity makes these contracts less than ideal for aggressive options trading strategies.
What Does RBOB Stand for?
RBOB is Reformulated Blendstock for Oxygenated Blending, a mix of petrochemicals intended to be mixed with ethanol to produce finished motor gasoline.
What Is RBOB Gasoline?
RBOB is a distillation of hydrocarbons from crude oil that is used to produce gasoline fuel. After it is distilled from petroleum, RBOB is blended with ethanol to produce reformulated gasoline.
How Do You Find the Price of RBOB Gasoline?
The market price for RBOB gasoline can be found on the websites of any commodity marketplace, such as CME or NASDAQ.
What Is the Difference Between CBOB and RBOB Gasoline?
CBOB stands for Conventional Blendstock for Oxygenate Blending, a gasoline blendstock that is similar to RBOB. But they have different final products: CBOB is blended with ethanol to produce E10 gasoline, while RBOB is blended with ethanol to produce reformulated gasoline. Reformulated gasoline is mandatory in some states, so RBOB accounts for about 30% of the U.S. market.
What Causes RBOB to Spike?
Much of the U.S. gasoline supply comes from refineries in the Gulf Coast region. As a result, weather events or supply congestion in that area can cause short-term delays or price spikes.