SPGSHUP: Weakness Is Set To Persist, As Gasoline Oversupply Lingers


Investment thesis

Since our last take on the S&P GSCI Unleaded Gasoline Index Excess Return (SPGSHUP), our bearish recommendation has not materialized, following the moderate advance of the ETF that gained 3.77% to $1,011.

Going forward, our view is unchanged and we maintain our bearish recommendation on the ETF, given a confluence of factors. First, and in spite of U.S. gasoline storage withdrawing for the fifth consecutive week, U.S. gasoline reserves remain in a slight surplus compared to the five-year average, weighing on the complex and its proxy SGSHUP.

Besides, although the speculative sentiment remains slightly bullish, gasoline markets are still oversupplied and weak motorist crack spreads continue to provide downward pressure on the complex.

Gasoline storage surplus and unfriendly price seasonality weigh on the motorist blend

According to the EIA, gasoline reserves in the U.S. continued to decline on the week ending October 25, down 1.36% (w/w) to 220.1m barrels, reaching the fifth consecutive weekly decline. While this slight storage decline contributed to easing the five-year gasoline surplus to 1.2% or 2,694k barrels, the storage picture is still evolving in a moderate deficit of 2.7% or 6,112k barrels compared to 2018 levels.

In this context, the storage picture of U.S. gasoline remains bearish for the complex and for its proxy SPGSHUP, even if last year reserves topped the ten-year average.

Source: U.S. Stocks of Crude Oil Report and Petroleum Products – EIA

In spite of that, RBOB pricing is in the middle of the five-year price range, trading close to the $1.5 per gallon threshold and maintaining its horizontal trading pattern.

Source: Quandl, Oleum Research

On the other side, the seasonality of gasoline stockpiles are unfavorable for the month of November, declining in average 2.8% in the last 10 years, amid refining utilization rates recovering from their yearly maintenance period. Besides, RBOB price seasonality for the corresponding month is also negative, indicating that in spite of declining storage levels, November underperformance lingers on the SPGSHUP Index.

Source: EIA, Oleum Research

Source: Quandl, Oleum Research

Speculator bets

During the week ending October 22, net speculative positioning on Nymex gasoline futures advanced moderately, up 5.34% (w/w) to 61,928 contracts, the CFTC shows, posting the second consecutive weekly advance. In the meantime, the SPGSHUP edged marginally lower, down 0.09% (w/w) to $966.62.

Source: CFTC

While this healthy increase has been attributable to moderate long accretions, up 3.25% (w/w) to 127,655 contracts, fresh short accumulations, up 1.35% (w/w) to 65,727 contracts partly offset this build.

That being said, the speculative sentiment on the gasoline blend is still bullish for the time being, with bull positioning overweighing shorts by a ratio of 0.6x. In spite of that, short open interest is still skewed to the downsides, given that the ratio established at 17.57% compared to its 20-week average of 16.09%. In this context, short positioning strength continues to minimize the advance of bullish bets, somewhat offsetting the advances of gasoline prices.

Since the beginning of 2019, net spec bets on gasoline futures reduced their decline, down 25.3% or 20,969 contracts, whereas SPGSHUP’s YTD performance eased its climb, up 21.47% to $983.37.

While supply-demand equilibrium tightens slightly, weak gasoline cracks sustain our bearish view on the complex

The gasoline balance tracking supply-demand flows has moderately appreciated, following an uptick in domestic demand, up 2.02% (w/w) to 9.78m barrels per day and a healthy gasoline export advance, up 4.32% (w/w) to 652k barrels per day. In front of that, aggregate supply lifted slower, up 1.76 (w/w) to 10.2m barrels per day, whereas imports declined 3.44% (w/w) to 673k barrels per day.

With these developments, and although gasoline demand advanced healthily in the past weeks, gasoline markets are still oversupplied, providing renewed headwinds for the complex and its proxy SPGSHUP.

Source: Quandl, Oleum Research

On the other side, gasoline cracks edged moderately higher during the week ending October 25. Yet, the spread continues to evolve below the $10 per barrel threshold and seems to be nearing its top, following the lengthy advance seen in the previous weeks.

Source: Quandl, Oleum Research

Furthermore, while the Brent future curve is now evolving in a steep contango on the next three months, the gasoline future curve flattened on the same deliveries, indicating that refining margins are expected to weaken, which is negative for the complex.


In this context, in spite of U.S. gasoline reserves weakening for the fifth consecutive week, the gasoline storage picture remains in a slim surplus, bringing downward pressure on the ETF.

Besides, while net speculative bets are still positioned to benefit from a bullish run, gasoline markets remain oversupplied, whereas weak motorist crack spreads contribute to sustain our bearish view on the complex.

We look forward to reading your comments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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