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Americans are expected to feel the heat of soaring crude prices at the pumps. This is especially true as the drone attack on the heart of Saudi Arabia’s oil production facilities in Abqaiq and Khurais has disrupted more than 5% of global oil supply and pushed price higher (read: Saudi Attack Threatens Oil Supply: Energy ETFs Set to Soar).
The sudden jump in crude oil prices above $60 per barrel may lead to an increase in gas prices in a few days. According to oil analyst Andy Lipow, U.S. gas prices will increase about 20 cents per gallon because of the recent attacks in Saudi Arabia. This will push the national price-per-gallon average to above $2.70 over the next week to 10 days. The national average of gas prices has been around $2.56 per gallon for the last week, according to AAA.
Per an analyst at GasBuddy, an increase of 15-30 cents per gallon in average U.S. pump prices is likely during the repairs in Saudi Arabia.
Given this, U.S. RBOB October gasoline increased 12.8% on Sep 16. The increase comes during a time of the year when prices typically fall due to the transition to winter-grade gasoline, which is cheaper to make.
Investors could easily take advantage of surging gas prices by focusing on United States Gasoline ETF (UGA - Free Report) , which allows investors to make a direct play on the commodity of RBOB gasoline (read: Best & Worst Zones of 1H19 and Their ETFs).
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 25,000, suggesting that investors have to pay extra beyond the annual fee of 75 basis points (bps) per year. The fund has managed assets of $31.3 million and increased 10.5% on Sep 16.
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 it 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).
Bottom Line
Given that gasoline prices are on the rise and will continue to do so at least in the near term, 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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Gasoline ETF Spikes After Saudi Oil Attack
Americans are expected to feel the heat of soaring crude prices at the pumps. This is especially true as the drone attack on the heart of Saudi Arabia’s oil production facilities in Abqaiq and Khurais has disrupted more than 5% of global oil supply and pushed price higher (read: Saudi Attack Threatens Oil Supply: Energy ETFs Set to Soar).
The sudden jump in crude oil prices above $60 per barrel may lead to an increase in gas prices in a few days. According to oil analyst Andy Lipow, U.S. gas prices will increase about 20 cents per gallon because of the recent attacks in Saudi Arabia. This will push the national price-per-gallon average to above $2.70 over the next week to 10 days. The national average of gas prices has been around $2.56 per gallon for the last week, according to AAA.
Per an analyst at GasBuddy, an increase of 15-30 cents per gallon in average U.S. pump prices is likely during the repairs in Saudi Arabia.
Given this, U.S. RBOB October gasoline increased 12.8% on Sep 16. The increase comes during a time of the year when prices typically fall due to the transition to winter-grade gasoline, which is cheaper to make.
Investors could easily take advantage of surging gas prices by focusing on United States Gasoline ETF (UGA - Free Report) , which allows investors to make a direct play on the commodity of RBOB gasoline (read: Best & Worst Zones of 1H19 and Their ETFs).
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 25,000, suggesting that investors have to pay extra beyond the annual fee of 75 basis points (bps) per year. The fund has managed assets of $31.3 million and increased 10.5% on Sep 16.
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 it 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).
Bottom Line
Given that gasoline prices are on the rise and will continue to do so at least in the near term, UGA could be an interesting pick for investors looking to make a concentrated play on the gasoline segment of the energy market.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>