4 Factors You Didn't Know About RBOB

RBOB gasoline futures contract is listed on the Chicago Mercantile Exchange (CME) under the futures symbol RB. Although it does not receive as much general 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.

What Is Gasoline?

Gasoline is a byproduct of the refining of crude oil. Crude oil is composed of a number of different hydrocarbons. The hydrocarbons have chains of molecules of different lengths. The longer the chains, the heavier the hydrocarbon. The different chain lengths have higher boiling points as they get longer.

Key Takeaways

  • Investors can hedge and speculate with RBOB gasoline futures, which are listed on CME under ticker RB.
  • Futures contracts are bought on margin and this added leverage can magnify gains or losses.
  • 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.

Oil refineries separate out the different chains by heating the crude oil to certain vaporization points. Gasoline is created by the vaporization of chains with boiling points below that of water. These different chains are blended together in various amounts to provide a consistent product for gasoline.

What Fuels Gasoline Prices?

RBOB stands for reformulated blendstock for oxygenate blending. 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 supply and demand for RBOB.

How Is Gasoline Traded?

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, which works out to a price move 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.

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.

Leverage, Calendar Spreads, and Options

Leverage when trading futures with margin 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 margin on a calendar spread—for example, buying the April futures contract and selling the May futures contract—is $910 and much less than the margin for just a long or short futures position.

This margin amount with calendar spreads is less because the two contracts have a high degree of correlation and generally move in the same direction together. However, one contract might move more than the other due to market conditions and 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.

Lastly, investors can trade options or options spreads because puts and calls on RBOB gasoline futures are available for trading as well. 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.

Article Sources

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  1. Chicago Mercantile Exchange Group. "RBOB Gasoline Futures Quotes." Accessed May 25, 2020.

  2. Energy Information Administration. "Oil and Petroleum Products Explained." Accessed May 25, 2020.

  3.  International Human Resources Development Corporation. "Crude Oil and Natural Gas: From Source to Final Products." Accessed May 25, 2020.

  4. Chicago Mercantile Exchange Group. "RBOB Gasoline Futures Contract Specs." Accessed May 25, 2020.