Undervalued CME RBOB

Conventional wisdom says that the transition from fossil fuels to renewables, which is well under way, should have a more profound adverse impact on gasoline than on distillates. This is simply because the switch from combustion engines to electric vehicles (EVs) is expected to take place faster than replacing agricultural machinery or ships with their electric versions, or installing heat pumps at homes. Logic, therefore, dictates that the price pressure on gasoline, or on the CME RBOB futures contract, should be more intense than on distillates/diesel, or the CME Heating Oil futures contract.

This tendency is exhibited on the chart above. The average annual discount the front-month CME RBOB contract displays versus Heating Oil has been getting wider. The devil, however, is in the detail and scratching the surface reveals that the 2024 outlook is not as straightforward as the graph implies. To begin with, the amplified RBOB weakness experienced in 2008 and 2022 was the function of economic downturns in both cases, consequently those are more the exceptions than the rule.

Secondly, while U.S. gasoline demand is forecasted to be close to plateauing, its market share to total U.S. oil demand and to distillate fuels will not deteriorate, according to EIA data. It will still make up 45% of total refined product consumption in 2024, the same as in 2018 with the distillate share at 20%, also unchanged from five years ago when the RBOB/Heat spread averaged -17.76 cents/gallon.

Thirdly, globally, and more importantly in the U.S., sales growth of EVs are decelerating considerably due to high prices and negative publicity on safety. Annualized growth in the U.S., which stood at 135% in May 2022, has retreated to 45% by September 2023. It could imply that both U.S. gasoline demand growth and the CME RBOB contract 2024 curve relative to Heating Oil, are underestimated. The futures market for next year shows a heat premium of more than 40 cents/gallon against RBOB (as of CoB November 20). Apart from 2008 and 2022 it is a historic low and those who believe that U.S. gasoline demand will prove more resilient than currently anticipated might just find it tempting to bet on the narrowing of this differential.

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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