What to know about trading refined product futures

Gasoline and diesel are the main products produced from crude oil and consumed as fuel.  The prices of gasoline, diesel and crude oil can be closely tied. But gasoline and diesel prices respond to additional variables, are more volatile than crude oil and offer unique trading opportunities

Gasoline and diesel, along with jet fuel and fuel oil, are collectively called refined products because they are products that are made by refining crude oil.  Oil refineries are large, complex industrial process facilities located around the world. The amount of gasoline and diesel produced from refineries depends on global refinery capacity and largely on the operating rate and configuration of those refineries.  On average, a barrel of crude oil that runs through a complex refinery produces about 45% gasoline and 30% diesel; however, this can vary.

Gasoline is mainly consumed in automobiles and light duty trucks as on-road fuel.  The United States is the largest consumer of gasoline in the world. Diesel is also primarily consumed for on-road transportation, with demand in the U.S. coming from the commercial sector such as trucking fleets and railroads.  Unlike gasoline, diesel is also used as fuel for industry – mainly agriculture and manufacturing – and as commercial and residential heating fuel in the winter.

Futures for Gasoline and Diesel

CME Group's NY Harbor ULSD futures contract (exchange code: HO[1]) is the main benchmark used for pricing and trading the distillates products market including diesel, heating oil and jet fuel.  ULSD stands for ultra-low-sulfur diesel, which is the type of diesel used for most on-road and home heating use in the United States. The price of NYH ULSD futures for any given contract month represents the value of ULSD for delivery at specified bulk terminals in the greater New York Harbor area during the contract month[2].

Gasoline has an actively traded futures contract on CME Group called RBOB Gasoline futures.  Like NY Harbor ULSD, RBOB Gasoline futures represent the value of RBOB gasoline delivered to specified bulk terminals in the greater New York Harbor area during the contract month.  RBOB stands for “reformulated blendstock for oxygenate blending” and is the type of gasoline required for use in the region, as well as other densely populated areas in the United States[3].

RBOB gasoline and ULSD are traded in dollars and cents per gallon, while crude oil is traded in dollars and cents per barrel. One barrel of oil is equal to 42 gallons. The following chart compares the price of front-month futures for gasoline and diesel in gallons and crude oil in barrels on comparable scales. Note that refined products tend to be more expensive than crude oil to allow for profit to produce them and that they can be significantly more volatile.

Chart 1. Front Month NYMEX Futures Prices: Crude Oil, ULSD and Gasoline

The main Crude Oil and Refined Products contracts are sized at 1,000 barrels and 42,000 gallons.  As one barrel equals 42 gallons, these are equal in quantity.  Smaller Micro futures are also available, sized at 100 barrels and 4,200 gallons.

Contract Title

CME Globex/ CME ClearPort Code

Contract Unit

Price Example

Example Notional

Light Sweet Crude Oil futures

CL

1,000 barrels

$82.50

$82,500

NY Harbor ULSD futures

HO

42,000 gallons

$2.2625

$95,025

RBOB Gasoline futures

RB

42,000 gallons

$2.4050

$101,010

Micro WTI Crude Oil futures

MCL

100 barrels

$82.50

$8,250

Micro NY Harbor ULSD futures

MHO

4,200 gallons

$2.2625

$9,503

Micro RBOB Gasoline futures

MRB

4,200 gallons

$2.4050

$10,101

Source: CME Group

NY Harbor: From the U.S. to the Globe

Located in both New York and New Jersey, the NY Harbor is the second largest container port in the nation and a main refined products hub with a network of terminals along the coast and the inland pipeline system.  NY Harbor receives supplies from refineries in New Jersey, Pennsylvania and Delaware, from Gulf Coast refineries via the Colonial Pipeline and from international refineries via barge.  It is also capable of loading ships to export. 

The connectedness of the NY Harbor area means that the prices of gasoline and diesel in NYH will respond to changes in the global market as well as regional supply and demand dynamics.  If the price of RBOB or ULSD in New York is too low relative to other regions, it will not attract sufficient supply to meet demand and prices must rise.  If the price in New York is too high, it will attract too much supply from imports or other parts of the U.S. and prices will fall.

Drivers of Refined Products Pricing

Like other commodities, the prices of refined products will change to reflect shifts in their respective supply and demand drivers.  Since both are produced from refineries, changes impacting refinery supply can impact both gasoline and diesel.  However, each also has unique drivers of supply and demand as well. 

Major Factors Impacting RBOB and ULSD Prices

  • Crude oil prices
  • Changes in refinery capacity (closures, new additions)
  • Unexpected events impacting refinery operations, such as floods, freezes, hurricanes, power outages in areas with significant refining capacity
  • Geopolitical events impacting trade with other nations, or operations at refineries abroad
  • State or Federal Environmental regulations
  • Operations and capacity of other key infrastructure such as Colonial Pipeline
  • Refinery margin: economic incentive to operate or to produce more of one fuel than another

Refined products can also be traded as a spread to crude oil, which is called a crack spread. Crack spreads reflect the difference between wholesale petroleum product prices and crude oil. These spreads are used as a proxy for refining profit margins.  When crack spreads are low, refineries may not have sufficient profit to operate. When crack spreads are very wide, it can encourage refineries to delay maintenance and operate at higher capacity than normal rates. 

A crack spread is measured in dollars per barrel and is calculated by converting the price of one refined product to barrels and subtracting the price of crude oil.  If May RBOB is priced at $3.5225 and May WTI is priced at $84.52, the May RBOB crack spread would be $2.8225 x 42 - $88.52 or $30.03 per barrel.

Chart 2. Front Month RBOB and ULSD Crack Spreads

Why Trade Refined Products?

Refined Products are volatile and there are a myriad of factors that impact their pricing.  While they are connected to crude oil prices, they often move separately, creating different risk and return characteristics.  Below are two hypothetical scenarios in which a trader might profit by using Refined Products futures instead of crude oil to express a crude point-of-view. The scenarios are indicative only and are intended solely to educate readers as to some of the potential uses of Refined Products, as well as demonstrating the way in which Refined Products interact with crude.

Scenario 1:  A trader believes that escalating geopolitical tensions should contribute to a rise in crude oil price. He was about to buy 10 WTI futures, but notices that RBOB cracks are trading at historical lows ($10.01) and hears that refinery margins are very low.  He believes that the RBOB price will rise with crude oil and may rise even more to widen the crack and provide economic incentive for refineries to operate. Thus, he buys 10 RBOB futures instead.  

Over the next week, tensions in the Middle East escalate and the prices of crude oil and gasoline rise, with the RBOB crack expanding by 25 cents to $10.35.   As a result, the trader earns $2,041.20 on his RBOB futures, while he would have only earned $1,700 if he had traded WTI futures.

The table below compares the results of trading crude oil futures and trading RBOB futures:

 

Price

Unit

Multiplier

Contracts

Notional Value

Buy 10 Jul24 Micro RBOB (MRBN4)

2.2812

$/gallon

4200

10

$95,810.40

Sell 10 Jul24 Micro RBOB (MRBN4)

2.3298

$/gallon

4200

10

$97,851.60

Profit on Micro RBOB futures

$.05

$/gallon

   

$2,041.20

Buy 10 Jul24 Micro WTI (MCLN4)

85.80

$/barrel

100

10

$85,800.00

Sell 10 Jul24 Micro WTI (MCLN4)

87.50

$/barrel

100

10

$87,500.00

            Profit on Micro WTI futures

$1.70

$/barrel

   

$1,700.00

Source: CME Group

Scenario 2: A trader is bearish crude oil prices, but is worried about adding a short position because WTI is only $.50 from its prior low of $78.50, which may provide technical support.  ULSD, on the other hand has lagged the decline in WTI, and is four cents per gallon ($1.68 per barrel) from its prior low.  He chooses to sell two contracts of Micro ULSD rather than two contracts of CL.  

Over the next week, crude oil trades down toward it’s prior low, but ULSD outpaces crude to the downside, with the ULSD crack declining by $1 per barrel.  The trader earns $286.44 on the ULSD trade as opposed to earning $86 if he had traded WTI instead.

The table below compares the results of trading crude oil futures and trading ULSD futures:

 

Price

Unit

Multiplier

Contracts

Notional Value

Sell 2 Aug24 Micro NY Harbor ULSD (MHOQ4)

2.4781

$/gallon

4200

2

$20,816.04

Buy 2 Aug24 Micro NY Harbor ULSD (MHOQ4)

2.4440

$/gallon

4200

2

$20,529.60

Profit on Micro ULSD futures

$.03

$/gallon

   

$286.44

Sell 2 Aug24 Micro WTI (MCLQ4)

78.98

$/barrel

100

2

$15,796.00

Buy 2 Aug24 Micro WTI (MCLQ4)

78.55

$/barrel

100

2

$15,710.00

              Profit on Micro WTI futures

$.43

$/barrel

   

$86.00

Source: CME Group

References

1 The ULSD futures contract was previously titled Heating Oil.  Though the contract title and quality specification for the futures contract was changed in 2013 to match changes shifts in environmental standards, it is still frequently referred to as Heating Oil futures.

The price of refined products at wholesale terminals differs from prices at the pump, though changes in both these prices are highly correlated.  The main reason for the difference is the application of federal, state and local taxes, transportation costs and retail margins. 

3 RBOB gasoline is a specific type of gasoline blendstock designed to be blended with 10% ethanol.  Ethanol is blended with RBOB at terminals to make finished gasoline that is then trucked to gas stations for consumption.  Because ethanol is corrosive, gasoline with ethanol cannot be shipped through pipelines or stored in regular gasoline tanks.


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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