Behind The Recent Surge In The United States Gasoline Fund, LP (UGA)

gas pumpThe start of the second half of 2013 has been surprisingly good for commodities. Hopes for a longer period of QE and a more sluggish dollar have buoyed commodities across the board, leading to some solid gains in a number of segments.

In particular though, investors saw strong performances in the energy commodity market. Oil, as represented by (NYSEARCA:OIL) or (NYSEARCA:USO), added more than 10% so far in the period, strengthened by better-than-expected data across the globe and some concerns over supplies as well.

Yet beyond the somewhat surprising strength in the oil market, investors saw even better performances in the gasoline segment of the commodity world. Futures tracking this important commodity added almost 15% in the first half of July, easily making it the top performing resources in the time frame.

Behind the Surge

While gasoline certainly benefited from the overall trends in the oil market—since gasoline is refined crude oil—there were also some other factors at play which led to gasoline’s outperformance. Most was in terms of refiner capacity and potential reductions in the overall gasoline output by some of the largest processors in the nation.

Recently, investors saw a facility that turns 600,000 barrels of crude oil a day into gasoline and other fuels shut down in Texas, while Phillips 66 also experienced an outage as well.  This led to a bit of short covering in the market as traders scrambled to reposition themselves more favorably for this type of environment.


Additionally, the futures curve for RBOB gasoline has become much more favorable. Prices were at $3.11/gal for front month futures contracts while contracts for the end of the year and early 2014 were around the $2.75 mark (read Pump Profits with This Gasoline ETF).

This suggests that as traders roll from one contract to another, there isn’t as much of a roll yield issue and that returns aren’t cut into as much. Plus, backwardated contracts tend to rise as the expiration (or delivery) date approaches, potentially putting the wind at the backs of many gasoline traders so long as this situation continues.

How to Play

This is a somewhat precarious situation, as the U.S. market is somewhat flooded with oil, so it is just a matter of turning the crude product into refined gasoline. Still, the performance of gasoline so far this month has been encouraging and some commodity-focused investors may want to give it a closer look.

While just buying up futures contracts could be a way to go, an ETF approach may be friendlier to the average investor. This technique looks to get the same futures-based exposure, but in a safer exchange traded form, making it perfect for those who want to tap into this trend but are squeamish about the high risks involved in futures trading.

For these investors, a closer look at the United States Gasoline ETF (NYSEARCA:UGA), which we have discussed in greater detail below, could be a great idea:

Gasoline ETF in Focus

This ETF gives investors exposure to front-month gasoline futures, tracking RBOB gasoline for delivery to the New York harbor which is traded on the NYMEX. For this exposure, the fund charges investors 88 basis points a year in fees.

Yet unlike some of its counterparts in the commodity world, this ETF hasn’t really caught on, as it has under $70 million in assets. Plus, volume is below 50,000 shares a day, suggesting modest bid ask spreads.

UGA is, however, the only way to target gasoline in concentrated form, unless of course you want a broad energy ETF which includes RBOB gasoline, but has exposure to a variety of other commodities as well.

Performance is where the fund has really shined lately, as the ETF has added about 8.6% in the past month. This compares extremely favorably to both broad stocks, and broad energy ETFs like DBE as well. Plus, the bulk of the gains have come lately, suggesting that UGA is starting to come into its own thanks to the supply factors described above, as evidenced by the three month return of 15.9% for the gasoline ETF.

Bottom Line

Commodity investing has been pretty weak so far in 2013, but some products are finally starting to turn it around in Q3. One such commodity that has had an especially good start is gasoline, which has benefited from strong data, refinery issues, and a favorable futures curve (also readCrude Oil ETF Investing 101).

While this trend may not continue for the rest of the year, there still could be some gains to be had in this corner of the commodity world, suggesting that investors may want to take a closer inspection of UGA for their portfolios. This has been the best performing commodity ETF in the first half of July, and if the aforementioned trends continue, this ETF could remain a top pick in this corner of the fund world.

This article is brought to you courtesy of Eric Dutram.

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