Hopes for a prolonged QE program under the leadership of Janet Yellen – nominated Fed chairperson – has spread optimism globally across commodities. This has resulted in a weakening dollar and higher prices for crude oil and refined crude products like gasoline.
The average price of gasoline bounced to nearly $3.20 per gallon from its 33-month low of about $3.17 earlier last week. Immediately following Yellen’s testimony which suggested to many that the stimulus would be kept intact at least for the short term, gasoline price gained almost a penny in last Wednesday trading. This marks the biggest one-day gain since October 16th (read: 3 Commodity ETFs Surging Higher).
A rise in global oil prices and refinery issues on the East Coast also supported the rising gasoline price. The rise also spread cheers in the ETF world as the pure play on the gasoline futures market – United States Gasoline ETF (NYSEARCA:UGA) – was up nearly 4.3% last week. This easily outpaced the gain of 3.31% for Brent Oil (NYSEARCA:BNO) and 0.38% loss for WTI crude oil (NYSEARCA:USO).
However, this gain looks to be short-lived given the demand/supply imbalances and negative macro fundamentals. The ETF is down over 2% in the year-to-date time frame and more than 6% in the past 90 days. The fund has managed assets of $57.6 million so far.
The fund seems on a downtrend based on both technical and fundamental factors described below:
The fund currently trades near its 52-week low of $53.35 and its short-term moving averages are well below the long-term average as depicted by the 200-Day SMA in the chart below. This suggests continued bearishness for this ETF.
This is further confirmed by the downswing in the Parabolic SAR, although this figure should definitely be monitored closely. Moreover, volume doesn’t look great, probably indicating a low level of interest and additional cost in the form of a wide bid/ask spread beyond the expense ratio of 0.60%.
The fund provides investors exposure to front-month gasoline futures, tracking RBOB gasoline for delivery to the New York harbor which is traded on NYMEX.
As traders need to roll from one future contract to another, it can enjoy the benefits of a roll yield. If the front-month contract is higher than the next-month contract (also called backwardation), the roll yield is positive.
Currently, the gasoline market is in backwardation, which is bullish for the commodity and the gasoline ETF UGA. However, this situation does not look to be sustainable, as the RBOB gasoline futures contract for January 2014 is trading lower than February, signaling negative roll yield (contango).