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Ride Higher With Gasoline ETF as Price at Pump Surges to $5
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Americans are feeling the heat of soaring prices at the pumps thanks to the recovery from the pandemic and Russia's invasion of Ukraine. The national average for a gallon of gas spiked to $5.00 for the first time in over two decades, according to data from AAA. This marks the rise of 18 cents from the previous week and $1.92 higher than this time last year (read: 5 ETFs Outperforming as Commodity Gauge Hits New High).
The milestone came at the start of the peak summer driving season, which will continue to push gas prices higher. Investors could easily take advantage of surging gas prices by focusing on the pure-play United States Gasoline ETF (UGA - Free Report) , which allows investors to make a direct play on the commodity of RBOB gasoline. The fund has jumped 94% so far this year.
Fuel demand will likely climb higher as drivers are "regaining their travel time" after being restricted over the past two years. Road travel has strongly rebounded to near pre-pandemic levels given a rapid return of business along with vaccine acceptance and the reopening of borders. Meanwhile, sanctions on oil producer Russia after its invasion of Ukraine, and a squeeze on refining capacity are driving gas prices higher.
Additionally, the start of hurricane season could further threaten supply, leading to a spike in gas prices. The surge was also supported by the persistent rally in crude oil prices as the global price of crude oil accounts for roughly half of what Americans pay to fill up at the gas station. The war in Ukraine has forced global refiners, tanker companies and traders to avoid Russian exports, forcing up to three million barrels of oil a day off the market.
UGA in Focus
United States Gasoline ETF is designed to track in percentage terms the movements of gasoline prices. The benchmark futures contract is the futures contract on gasoline as traded on the NYMEX. If the near-month contract is within two weeks of expiration, the benchmark will be the next-month contract to expire. United States Gasoline ETF is illiquid with a daily trading volume of about 82,000, suggesting that investors have to pay extra beyond the annual fee of 0.90% per year. The fund has managed assets of $188.5 million (read: 10 Top-Performing Oil-Energy ETFs of May).
As traders need to roll from one future contract to another, the fund is susceptible to roll yield. Notably, roll yield is positive when the futures market is in backwardation and negative when the futures market is in contango. Basically, if the price of the near-month contract is higher than the next-month futures contract, then it is backwardation and the opposite holds true in contango.
State of Backwardation on UGA
United States Gasoline ETF is poised to benefit from the prolonged period of backwardation, where later-dated contracts are cheaper than near-term contracts. Currently, the gasoline market is in backwardation, which is favorable for the commodity and the gasoline ETF UGA. As such, the fund continues to roll over the next-month futures contracts at a lower price, thereby making profits. This signals continued bullishness in the commodity. This trend is likely to persist at least in the near term, acting as the biggest catalyst for the commodity (see: all the Energy ETFs).
Bottom Line
Given that gasoline prices are on the rise and will continue to remain steep at least in the near term, UGA could be an interesting pick for investors looking to make a concentrated play on the gasoline segment of the energy market.
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Ride Higher With Gasoline ETF as Price at Pump Surges to $5
Americans are feeling the heat of soaring prices at the pumps thanks to the recovery from the pandemic and Russia's invasion of Ukraine. The national average for a gallon of gas spiked to $5.00 for the first time in over two decades, according to data from AAA. This marks the rise of 18 cents from the previous week and $1.92 higher than this time last year (read: 5 ETFs Outperforming as Commodity Gauge Hits New High).
The milestone came at the start of the peak summer driving season, which will continue to push gas prices higher. Investors could easily take advantage of surging gas prices by focusing on the pure-play United States Gasoline ETF (UGA - Free Report) , which allows investors to make a direct play on the commodity of RBOB gasoline. The fund has jumped 94% so far this year.
Fuel demand will likely climb higher as drivers are "regaining their travel time" after being restricted over the past two years. Road travel has strongly rebounded to near pre-pandemic levels given a rapid return of business along with vaccine acceptance and the reopening of borders. Meanwhile, sanctions on oil producer Russia after its invasion of Ukraine, and a squeeze on refining capacity are driving gas prices higher.
Additionally, the start of hurricane season could further threaten supply, leading to a spike in gas prices. The surge was also supported by the persistent rally in crude oil prices as the global price of crude oil accounts for roughly half of what Americans pay to fill up at the gas station. The war in Ukraine has forced global refiners, tanker companies and traders to avoid Russian exports, forcing up to three million barrels of oil a day off the market.
UGA in Focus
United States Gasoline ETF is designed to track in percentage terms the movements of gasoline prices. The benchmark futures contract is the futures contract on gasoline as traded on the NYMEX. If the near-month contract is within two weeks of expiration, the benchmark will be the next-month contract to expire. United States Gasoline ETF is illiquid with a daily trading volume of about 82,000, suggesting that investors have to pay extra beyond the annual fee of 0.90% per year. The fund has managed assets of $188.5 million (read: 10 Top-Performing Oil-Energy ETFs of May).
As traders need to roll from one future contract to another, the fund is susceptible to roll yield. Notably, roll yield is positive when the futures market is in backwardation and negative when the futures market is in contango. Basically, if the price of the near-month contract is higher than the next-month futures contract, then it is backwardation and the opposite holds true in contango.
State of Backwardation on UGA
United States Gasoline ETF is poised to benefit from the prolonged period of backwardation, where later-dated contracts are cheaper than near-term contracts. Currently, the gasoline market is in backwardation, which is favorable for the commodity and the gasoline ETF UGA. As such, the fund continues to roll over the next-month futures contracts at a lower price, thereby making profits. This signals continued bullishness in the commodity. This trend is likely to persist at least in the near term, acting as the biggest catalyst for the commodity (see: all the Energy ETFs).
Bottom Line
Given that gasoline prices are on the rise and will continue to remain steep at least in the near term, UGA could be an interesting pick for investors looking to make a concentrated play on the gasoline segment of the energy market.