Underappreciated RBOB

Most commodity index providers base their weightings on global physical supply and demand data. This logically means that the two major crude oil contracts play the biggest role in any basket – WTI traditionally more significant than Brent. Products, given that they are produced from crude oil, receive less weighting. The performance of the crude oil contracts, consequently, has an outsized impact in shaping the annual return of commodity or oil indices.

However, with some well-founded and justified tweaking, the annual returns could be bettered. Historical data suggests that RBOB, by far, is the most successful component of the oil basket that comprises of the five major oil futures contracts. On the above chart it is clearly visible that it has outperformed ICE Brent for most of the past 16 years and the same tendency is observed against the other major oil futures contracts. The explanation for this superiority is obvious. No other contracts yield as much extra profit from rolling length from the expiring contract to the subsequent one as RBOB. From 2007 monthly the roll-overs added an extra $97/bbl equivalent profit to its performance. It compares with $43/bbl equivalent for gasoil and $7/bbl equivalent for heating oil.

The roll-over profit is the function of the generally backwardated nature of the RBOB contract, which given the size of the U.S. gasoline market, is logical. The U.S. consumes close to nine mbpd of gasoline, nearly two-third of the total OECD demand. U.S. drivers average around 14,000 miles per year, almost twice as much as in Europe. Periodically, especially during the summer driving season, domestic refiners are unable to satisfy this unquenchable thirst and rely on imports, which could and does lead to supply tightness resulting in steep backwardation.

Disproportionately high gasoline consumption would justify re-balancing of commodity baskets and more weight on the motor fuel. This re-alignment, in turn, could improve the annual returns. Of course, past performance is no guarantee of future result but as long as the U.S. remains the world’s most significant gasoline consumer (SUV sales are booming, EV sales are lagging) gasoline could potentially keep outperforming its peers.


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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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