The RBOB Technicals: Relief Ahead

Thirty days ago, RBOB prices at the wholesale level peaked putting in a high in May futures of approximately $3.30/gallon. Since then prices are off nearly 7% and as of this post prices are penetrating a trend line that has held since mid-December. We are also witnessing a trade under the 50-day MA, identified by the green line on the chart below. If prices close below that pivot point, it would be the first settlement under that level for the year.

Price Watch
As you can see, prices are approaching the 38.2% Fibonacci retracement, a level that served as support two weeks ago when prices dropped nearly 6% in nine trading days. The bounce was weak, with prices putting in a lower high. Right now, I expect RBOB to penetrate the 38.2% Fibonacci level and trade under $3 in the coming weeks. The 100-day MA (light blue line) falls squarely between the 50% and 61.8% Fibonacci levels. This makes $2.9650 a reasonable target.

The RBOB Play
Rather than an outright trade on RBOB futures, I favor plays on the spread between RBOB and heating oil. Look to sell one (1) RBOB contract while simultaneously buying one (1) heating oil contract. Both contracts leverage 42,000 gallons, so make sure to trade these 1:1. The current RBOB: Heating Oil spread in May is showing a 7-cent premium on RBOB. I expect this spread to narrow, at a minimum. I actually see the spread inverting in the weeks ahead, with heating oil trading at a premium to RBOB (as opposed to a discount, which it is currently). A 1-cent move on the spread represents a loss/gain of $420 (per spread)… trade accordingly, based on your account size.

Even if not looking for a trade idea maybe the lower trade in RBOB will help our wallets as consumers. If we see prices trade under $3/gallon at the wholesale level we should start to see some relief at the pump. It may not seem like a huge difference but a 30-40 cent drop per gallon likely equates to $25-40 per consumer/per month. What would you do with this new found disposable income?

Risk Disclaimer: The opinions contained herein are for general information only and are not intended to provide specific investment advice or recommendations and are not tailored to any specific’s investor’s needs or investment goals. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results.