Gasoline Is All It Is Cracked up to Be


"Where do you expect gasoline prices to be when you need a summertime fill-up: higher or lower than now?"

Welcome to May, the start of the summer driving season. What? Not quite ready to pack up the family chariot and head off to recreate?

Well, when you're actually ready to drive, you'll encounter competitors for gasoline at the pump. Where do you expect gasoline prices to be when you need a summertime fill-up: higher or lower than now?

Gasoline prices have a tendency to rise ahead of the summer driving season. Fluctuations in crude oil prices, though, impact petrol prices. If crude tailspins, gasoline prices won't hold their ground, much less rally. And, if oil prices spike higher, gasoline can get might expensive. Accordingly, gasoline traders have to be exquisitely sensitive to crude oil's vacillations.

Last year, gasoline prices were dragged to ridiculously high levels by a hyperactive crude oil market, but refining profits actually fell. Part of the reason was political. Refiners kept distillate prices as low as they could to avoid opprobrium from an increasingly scolding Congress and to mollify consumers. Now we're back to normal.

The gasoline crack spread—the profit that's earned by converting a barrel of crude oil into a barrel of unleaded gasoline blend stock [RBOB]—sunk to new lows when crude bottomed out at year-end 2008. Now the margin is $20 per barrel higher.

Where do you expect crude to go from here—higher or lower? How would you bet refining margins will move? Now that prices have dropped and the election has passed, the congressional appetite for confronting oil company execs has been sated.

And now that you have the means to trade the RBOB crack spread by pitting the ProShares UltraShort DJ-AIG Crude Oil ETF (NYSE Arca: SCO) against a double dose of the United States Gasoline Fund (NYSE Arca: UGA) accordingly.

So, which side are YOU going to buy?

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