Carnac the Magnificent
May 6, 2008 11:27 AM
Can gasoline futures be used to predict the price we will pay for fuel at the local pump?
Used to be a gasoline price jump at the pump would be just a penny or two, hardly noticeable. Lately, the price seems to increase 12-15 cents at a time. By studying gas futures, can we know which days are likely to have the next price increase, enabling us to top off the tank the day before?
Used to be a gasoline price jump at the pump would be just a penny or two, hardly noticeable. Lately, the price seems to increase 12-15 cents at a time. By studying gas futures, can we know which days are likely to have the next price increase, enabling us to top off the tank the day before?
Yes, kinda sorta. But let me explain first what futures are and then secondly why it won't really do you any good.
The NYMEX RBOB (RB) futures contract is traded tens of thousands of times day in Chicago and electronically around the globe. There are separate contracts for each month of the year. At the end of the month if you hold a contract for that month then you must take delivery of 1000 barrels of RBOB-formulated gasoline in New York Harbor. If you've sold a contract then you must deliver 1000 barrels of gasoline.
Futures are used for three reasons:
1) Consumers (e.g. airlines) use it to hedge against cost of gasoline in their business.
2) Producers (e.g. refiners) use it to reduce volatility and fix their delivery at a set price.
3) Speculators use it to gamble.
What you're probably wondering is, "Why are there separate contracts for each month of the year?"
And there are three parts to this answer:
1) Because of shifts in demand, gasoline in the summer driving season is worth more than gasoline in the winter. The same is not true for diesel, however, for reasons I won't get into.
2) Refiners produce different amounts of gasoline at different times during the year. For more information on this, see Wikipedia or google for "refinery run optimization".
3) The gasoline specification actually changes slightly in June. This means it's more costly to blend gasoline for delivery in summer months. This is a large part of the reason why gasoline costs a lot more for us in the summer.
Right now if you look at the NYMEX session overview you'll see that gasoline for delivery in June is $3.10 dollars/gallon while delivery in November is $2.88 dollars/gallon. This is, of course, pre-tax. :-)
Basically the market is saying, okay---given everything we know about gasoline, including the weather, inventory levels, broad supply & demand concerns, spec changes, etc., we expect gas will cost this much in x months. And when you factor in the risk-free interest rate, the cost of holding inventory, etc. you end up with the quoted price on the exchange.
To further complicate things, there are also over-the-counter futures contracts traded for delivery in other parts of the world. Why? Well, gasoline in New York doesn't cost the same as gasoline in Texas. In fact, it's a slightly different blend of gasoline all together. These contracts are usually quoted as offsets (or spreads) from the NYMEX price.
Right. So now you can see that it's going to be difficult to get a good handle on the daily fluctuations in your neck of the woods. There's just not that level of granularity. The best you can do is surmise that gasoline will cost a few pennies more on average as we roll into summer than it does right now. But who knows, it could go down twenty cents or up twenty cents too!
If you're looking to protect yourself personally against rising energy costs, you may want to look at investing in the S&P GSCI, a commodity index, or buying the United States Oil ETF (ticker: USO).
I share your concern regarding high gas prices, and I wish commodity futures were a crystal ball for predicting price movements, but unfortunately it doesn't work like that. They simply project the current equilibrium price level out along a curve, making it fair for people to trade products for future delivery.
posted by bloggboy at 1:32 PM on May 6, 2008
The NYMEX RBOB (RB) futures contract is traded tens of thousands of times day in Chicago and electronically around the globe. There are separate contracts for each month of the year. At the end of the month if you hold a contract for that month then you must take delivery of 1000 barrels of RBOB-formulated gasoline in New York Harbor. If you've sold a contract then you must deliver 1000 barrels of gasoline.
Futures are used for three reasons:
1) Consumers (e.g. airlines) use it to hedge against cost of gasoline in their business.
2) Producers (e.g. refiners) use it to reduce volatility and fix their delivery at a set price.
3) Speculators use it to gamble.
What you're probably wondering is, "Why are there separate contracts for each month of the year?"
And there are three parts to this answer:
1) Because of shifts in demand, gasoline in the summer driving season is worth more than gasoline in the winter. The same is not true for diesel, however, for reasons I won't get into.
2) Refiners produce different amounts of gasoline at different times during the year. For more information on this, see Wikipedia or google for "refinery run optimization".
3) The gasoline specification actually changes slightly in June. This means it's more costly to blend gasoline for delivery in summer months. This is a large part of the reason why gasoline costs a lot more for us in the summer.
Right now if you look at the NYMEX session overview you'll see that gasoline for delivery in June is $3.10 dollars/gallon while delivery in November is $2.88 dollars/gallon. This is, of course, pre-tax. :-)
Basically the market is saying, okay---given everything we know about gasoline, including the weather, inventory levels, broad supply & demand concerns, spec changes, etc., we expect gas will cost this much in x months. And when you factor in the risk-free interest rate, the cost of holding inventory, etc. you end up with the quoted price on the exchange.
To further complicate things, there are also over-the-counter futures contracts traded for delivery in other parts of the world. Why? Well, gasoline in New York doesn't cost the same as gasoline in Texas. In fact, it's a slightly different blend of gasoline all together. These contracts are usually quoted as offsets (or spreads) from the NYMEX price.
Right. So now you can see that it's going to be difficult to get a good handle on the daily fluctuations in your neck of the woods. There's just not that level of granularity. The best you can do is surmise that gasoline will cost a few pennies more on average as we roll into summer than it does right now. But who knows, it could go down twenty cents or up twenty cents too!
If you're looking to protect yourself personally against rising energy costs, you may want to look at investing in the S&P GSCI, a commodity index, or buying the United States Oil ETF (ticker: USO).
I share your concern regarding high gas prices, and I wish commodity futures were a crystal ball for predicting price movements, but unfortunately it doesn't work like that. They simply project the current equilibrium price level out along a curve, making it fair for people to trade products for future delivery.
posted by bloggboy at 1:32 PM on May 6, 2008
I will add to bloggboys excellent post above that studies have shown that futures prices are no better than spot (ie, cash) prices to predicting future cash prices.
posted by shothotbot at 3:29 PM on May 6, 2008
posted by shothotbot at 3:29 PM on May 6, 2008
I'm reading the question as asking if the date of the price change can be predicted from the futures (as opposed to the actual price).
I would expect that if a future increase in cost can be easily predicted, the people setting the prices are going to build it into the price immediately. So I would expect that the answer is: yes, the date can be easily predicted because it's always going to be "tomorrow."
posted by winston at 5:22 PM on May 6, 2008
I would expect that if a future increase in cost can be easily predicted, the people setting the prices are going to build it into the price immediately. So I would expect that the answer is: yes, the date can be easily predicted because it's always going to be "tomorrow."
posted by winston at 5:22 PM on May 6, 2008
Let me see if can refine (no pun intended) this question a bit. I have heard in the past that the price we pay at the pump usually runs about six months behind what the RBOB futures were. In other words, if the futures go up 2% today, we can expect that increase to hit our local filling station sometime in early November. Is this correct, or myth?
posted by netbros at 6:55 PM on May 6, 2008
posted by netbros at 6:55 PM on May 6, 2008
Refiners typically do sell their production many months ahead, but there's no fixed rule to it. The price they get at the rack (also the price distributors pay) depends on the local economics, and the price you pay at the station depends on a lot too---a price wars perhaps.
If you want to find out what the lag might be, you can check the EIA website. Here's a link for their weekly retail gasoline prices:
http://tonto.eia.doe.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm
And here's the link for the NYMEX spot price:
http://tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_d.htm
Let me run the numbers real quick and then I'll put together another post.
posted by bloggboy at 10:15 PM on May 6, 2008
If you want to find out what the lag might be, you can check the EIA website. Here's a link for their weekly retail gasoline prices:
http://tonto.eia.doe.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm
And here's the link for the NYMEX spot price:
http://tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_d.htm
Let me run the numbers real quick and then I'll put together another post.
posted by bloggboy at 10:15 PM on May 6, 2008
DATE PUMP NYMEX SPREAD 28-Apr 373.2 302.75 -70.45 21-Apr 364.5 297.54 -66.96 14-Apr 352 281.95 -70.05 7-Apr 345.3 277.15 -68.15 31-Mar 340.7 241.25 -99.45 24-Mar 338.6 245.7 -92.9 17-Mar 339.1 232.45 -106.65 10-Mar 332.9 255.98 -76.92 3-Mar 326.9 247.5 -79.4 25-Feb 321.3 249.98 -71.32 18-Feb 311.1 255.45 -55.65 11-Feb 304.3 231.52 -72.78 4-Feb 306.1 223.41 -82.69 28-Jan 308.3 229.4 -78.9 21-Jan 313 224.45 -88.55 14-Jan 317.9 233.13 -84.77 7-Jan 320.8 240.35 -80.45
posted by bloggboy at 10:16 PM on May 6, 2008
You can see that the price at the pump quickly follows a recent NYMEX price move, but it dampens its magnitude. This is what I'd expect. Producers, distributors, and middlemen have all hedged themselves enough that the volatility is absorbed by the traders.
I guess the answer to your question then is probably yes. If the market goes nuts, you might save a few pennies by going to the pump before they change the prices. Is it worth bothering with? Not likely.
posted by bloggboy at 10:21 PM on May 6, 2008
I guess the answer to your question then is probably yes. If the market goes nuts, you might save a few pennies by going to the pump before they change the prices. Is it worth bothering with? Not likely.
posted by bloggboy at 10:21 PM on May 6, 2008
This thread is closed to new comments.
(Approx 4 litres per gallon, recent increases of $3 per day = your 12-15c, although how the CAD does against the USD is also a factor here)
Generally though, if crude oil futures are up today, gas will be up tomorrow.
posted by Chuckles McLaughy du Haha, the depressed clown at 12:57 PM on May 6, 2008