When the crack spread is negative there is no incentive for refiners to purchase and refine Brent oil. This generally occurs during a recession or Brent oil is artificially buoyed by supply disruptions. When the crack spread is elevated and the price is well above the cost for refiners to convert Brent into RBOB, there is a large incentive to purchase and refine as much crude oil as possible. There are two components to the profit margin that a refiner can achieve. The first is the difference between the price of crude oil and the price of gasoline. The second is the difference between the cost to generate gasoline and the price where gasoline can be sold is the profit margin.
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, equivalent to a movement of $4.20 for one contract. A crack spread is the difference between the wholesale price of a refined petroleum product such as gasoline and the price of crude oil.
The supply of gasoline depends on the availability of both crude oil and refineries. Industry watchers measure refiners by their capacity, which is the amount of crude oil that can go into distillation units. These industrial facilities separate crude oil, which consists of different hydrocarbons, into smaller component hydrocarbons or fractions. CARBOB is even more expensive, and is the main reason why California gasoline prices are typically higher than anywhere else in the country. Since ethanol may increase the NOx, other additives and formulations are needed to meet higher air quality standards in California, which has a lower NOx limit. The map above illustrates a color-coded patchwork of different blends of reformulated gasoline, each one a specific cocktail for the climate.
This map predates the complete phase-out of MTBE, but it still accurately depicts the wide variety of reformulation required at the local level. RBOB’s price is most sensitive to supply-and-demand changes for the commodity. For example, hurricane weather in the Gulf of Mexico can have a big impact on RBOB’s price because it affects the supply produced by the many U.S. refineries in the gulf.
The Elements of a RBOB Contract
Another very actively traded crude oil is WTI (West Texas Intermediate). This is another light sweet crude oil that is used in the refining process to create gasoline. WTI is the US benchmark and since the US is the largest consumer of gasoline world-wide, WTI is an actively traded crude oil benchmark.
Longer chains make heavier hydrocarbons, as well as higher boiling points. Gasoline derives from refining crude oil, so the price of crude oil has a big impact on its price. The margins on calendar spreads https://www.dowjonesanalysis.com/ are lower because the two contracts have a high degree of correlation and generally move in the same direction. However, one contract might move more than the other due to market conditions.
What is the RBOB / Brent Crack Spread?
RBOB is a “BOB” (before oxygenate blending) because it is formulated for subsequent blending with 10% ethanol to form the final gasoline blend that is marketed to end users. Consumers use gasoline for fuel in cars, light trucks and motorcycles as well as recreational vehicles, boats and small aircraft. RBOB is more expensive to refine—more energy and more effort are required to pull some of the additional hydrocarbons out of the fuel. Producing reformulated gasoline using ethanol presents problems for refiners. Ethanol affects nitrogen oxides (NOx) and toxic emissions as well as Volatile Organic Compounds (VOCs).
Gasoline is also used as a fuel in equipment for construction, farming, forestry and landscaping. Electricity generators and emergency power supplies also use gasoline. Each fraction has molecule chains of different lengths, and each of these chains has a different boiling point. The Clean Air Act of 1970 introduced a tidal wave of regulation to the automotive and oil industries (and many others).
Gasoline is a mixture of those hydrocarbon chains with boiling points below that of water. These different chains are blended together in various proportions to provide a consistent product for motor fuel. A typical 42-gallon barrel of crude oil yields 45 gallons of petroleum products. Gasoline represents nearly half of the petroleum products https://www.forex-world.net/ produced, which ranks it as the number one product recovered during the refining process. Refineries heat crude oil at temperatures of several hundred degrees and place the boiling liquid into distillation columns called stills. The boiling process produces gasoline as well as other products including kerosene and diesel fuel.
WTI is quoted on the Chicago Mercantile Exchange for pickup in Cushing Oklahoma. This area is landlocked and therefore requires shipment via pipeline or rail. Crude oil is composed of a number of different hydrocarbons, or long chains of molecules.
- Much of the U.S. gasoline supply comes from refineries in the Gulf Coast region.
- Electricity generators and emergency power supplies also use gasoline.
- Producing reformulated gasoline using ethanol presents problems for refiners.
- Industry watchers measure refiners by their capacity, which is the amount of crude oil that can go into distillation units.
- Reformulated blendstock for oxygenate blending (RBOB) is a grade of gasoline used in U.S. futures contracts traded on commodity exchanges as a way to speculate on the price of oil.
Certain options strategies, like vertical spreads, have predefined profits and losses. 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. Oil refineries separate out the different chains by heating the crude oil to different vaporization points, and then distilling the resulting vapors.
How do you trade RBOB gasoline?
You may notice that between 2004 and 2006 there are many weeks where the dot is on the zero line—meaning no imports. But once the federal mandates kicked in, and the new EPA RFG maps for the US came online, imports https://www.forexbox.info/ of RBOB grew. Before I forget, there is the blending-stock cousin, CARBOB, a special RBOB formula mandated by the state of California. Well, let me introduce you to the two of them (and their cousin).
Additionally, RBOB price changes lag a few days behind the price you pay at the gas station. So, keeping an eye on RBOB prices can give you a sense of where retail gas prices are headed. RBOB gas is a grade of gasoline commonly used in the United States. It is common because it is considered better for the environment and is required in some areas. Much of the U.S. gasoline supply comes from refineries in the Gulf Coast region. As a result, weather events or supply congestion in that area can cause short-term delays or price spikes.
The spread between Brent and WTI has been as high at $28 per barrel and as low as -$3.6 per barrel. When the spread is elevated there is an incentive for US refiners to purchase WTI over Brent. You can use the CME Group website or the Nasdaq website to find the current price of a gallon of RBOB gas. Seasonal patterns also emerge as a result of formulation requirements for gasoline. Environmental regulations in the United States, for example, require gasoline sold in the summer to be less susceptible to evaporation. Each of these products is recovered at different temperature points.
What is Brent Crude Oil?
The alcohol in wine, beer, and that fine single-malt scotch is the same ethanol that is blended into our gasoline. The cold air allowed engines to run cooler, creating more unburned hydrocarbons. This, combined with the way cold air tends to trap warmer exhaust, created hazier and smoggier days. There isn’t an easy way to invest directly in RBOB gas with stocks or bonds, but you can invest in energy sector stocks and bonds affected by the same economic forces. There are also options for energy-related ETFs focused on oil and natural gas. Whereas buying an RBOB future could cost thousands, shares of ETFs can cost less than $20.
Top Countries by Gasoline Production
Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts. Increasing demand for gasoline in Asia, Latin America and the Middle East often outpaces supply from those regions. Demand for gasoline has been steadily declining in Europe and the United States. Mandated by the EPA, ethanol is the leading oxygenate added to gasoline in the United States.