Crude’s Dropping, So Go Long Gasoline ETF

July 08, 2015

With crude oil dropping like a stone again, you’d think prices of gasoline might be falling too. But they’re not.

Prices at the pump have always been notoriously slow to respond to dropping crude prices, though it’s probably fair to say that the 15 percent drop in crude prices in the past week is likely to work its way to motorists relatively quickly. But don’t expect much more than that.

Writ large, global “liquid supply”—to borrow the International Energy Agency’s nomenclature to describe crude and condensate—is up 3.1 million barrels a day from the 2014 average. That increase comes from around the world, even as U.S. supply increases derived from fracking show signs of slowing, Paris-based International Energy Agency (IEA) said.

That said, gasoline prices are being supported in the U.S. by a surge in demand, which is up year-on-year in July by 7 percent, according to the Washington, D.C.-based Energy Information Administration. Also, so far in 2015, demand is about 4 percent of the same year-earlier period.

Apart from demand increases, however, there appears to be a mismatch on a global scale between increasing supplies of crude and existing refining capacity, the IEA said in its report published on June 11, 2015.

Too Few Refineries?

“More than the rise in demand itself, it is that mismatch between product supply and product demand that seems to have supported prices,” the IEA said in its latest outlook on the oil market.

That mismatch helps explain the chart below of two of the ETF market’s more popular futures-based crude oil and gasoline funds. The United States Gasoline Fund (UGA | C-98) has risen almost 14 percent this year, and the United States Oil Fund (USO | B-100) is down by about 15 percent.

In fact, UGA was the best-performing commodity ETF in the first half, according to data compiled by

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