Gasoline futures: Poised in a Pennant
Since their April highs (@ 2.84 US$/gallon), gasoline futures have sold off sharply and are currently sitting at 2.31 US$/gallon (down 18.7% from those highs). The futures are also now trading below their 200 day moving average, and towards the bottom end of a long term pennant (i.e. a price pattern commonly used by market technicians). That pennant started to form in June 2022 (when prices peaked at 4.32 US$/gallon), with futures since then making lower highs, but also holding at major lows (see fig 1). Given that gasoline prices play a significant role in US politics, the question of which direction the prices will break out of the pennant is critically important (especially given the upcoming presidential elections).
Gasoline, as is well known, is a derivative of crude oil and thus highly correlated with crude’s price movements (with an r² of 0.94). Not surprisingly, therefore, oil prices have also sold off from their April highs (of 92.2 US$/barrel) and, like gasoline, have been tracing out a pennant pattern. Of late, crude oil started selling off again this past week, reflecting broader pressures across energy markets.
Uncertainty, around gasoline and oil prices, though, is high especially given the current geopolitical risks. In particular, the risk that this Middle Eastern conflict could broaden and draw in Iran and other regional actors. In that respect, ceasefire talks this week, led by US Secretary of State Antony Blinken, are critical. Failure to finalise an agreement will likely put another bid under the oil price (and therefore under gasoline prices), as the geopolitical risk premium priced into the oil market likely increases.
Added to that, from a positioning perspective, gasoline futures net positioning is currently sitting at rare historically neutral levels, as long positions have unwound significantly in recent weeks (from 53.8k contracts to 12.5k currently, fig 1a). Alongside that, our market timing models are generating BUY (oversold) signals (fig 1b). As a result, gasoline prices are poised for potential upside (and vulnerable to any newsflow, like geopolitical events or another strong storm in the Gulf of Mexico, which might trigger that).
Fig 1: Gasoline futures, shown with 50 & 200 day moving averages (US$/gallon)
Fig 1a: Gasoline net speculative LONG/SHORT positions vs. gasoline price (US$/gallon)
Fig 1b: Gasoline market timing model vs. gasoline price (US$/gallon)
