Tropical Storm Harvey has caused large-scale flooding along the U.S. Gulf coast, crippling Houston and its port. This has resulted in the shutdown of numerous refineries and to the scene is unlikely to change in the next few weeks or even months. Gasoline futures have, however, buoyed up on the calamity (read: Hurricane Harvey Puts These ETF Areas in Focus).
Touted to be the most powerful hurricane that has hit Texas in more than 50 years, Harvey could drop as much as 50 inches of rain, setting a state record. The US National Hurricane Center (NHC) stated that Harvey was moving away from the coast but was expected to linger close to the shore through Wednesday, and that floods would spread from Texas eastward to Louisiana. Notably, Texas is home to 5.6 million barrels of refining capacity per day while Louisiana has 3.3 million barrels.
As such, more than 2 million barrels per day of refining capacity is expected to be affected due to the storm thereby leading to a surge in gasoline prices. Using past hurricanes as a guide, Goldman estimates that the storm would cut gasoline supplies by 615,000 to 785,000 barrels per day while Barclays bank expects around 2-3 million barrels per day of refining capacity is offline or in the process of shutting down (read: Capex Cuts Are Back: What's in Store for Energy ETFs?).
Spot prices for US gasoline futures surged 7% to a peak of $1.7799 per gallon, the highest level since late July 2015. Investors could easily take advantage of surging gas prices by focusing on United States Gasoline Fund (UGA - Free Report) , which allows investors to make a direct play on the commodity of RBOB gasoline. The fund easily outperformed the other oil-based ETFs in the segment, gaining about 6% over the past five days against gain of 0.4% for United States Brent Oil Fund (BNO - Free Report) and loss of 1.8% for United States Oil Fund (USO - Free Report) . In fact, UGA also outpaced the broad PowerShares DB Energy Fund (DBE - Free Report) by a wide margin.
UGA in Focus
The fund provides investors with exposure to front-month gasoline futures, tracking RBOB gasoline for delivery to the New York harbor which is traded on NYMEX. The ETF is illiquid with daily trading volume of about 39,000, suggesting that investors have to pay extra beyond the annual fee of 75 bps per year. The fund has managed assets of $60.4 million so far (read: Oil & Gas ETF Industry Outlook).
As traders need to roll from one future contract to another, the fund is susceptible to roll yield. Notably, roll yield is positive when the futures market is in backwardation and negative when the futures market is in contango. Basically, if the price of the near month contract is higher than the next month futures contract, then this is backwardation and the opposite holds true in contango.
State of Backwardation on UGA
UGA is poised to benefit from the prolonged period of backwardation. Currently, the gasoline market is in backwardation, which is favorable for the commodity and the gasoline ETF UGA. This bullishness is expected to continue till the end of this year. Hence, the fund continues to roll over the next month futures contracts at a lower price, thereby making profits (see: all the Energy ETFs here).
Given that gasoline prices are on the rise on supply disruption, UGA could be an interesting pick for investors looking to make a concentrated play on the gasoline segment of the energy market.
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