UGA United States Gasoline Fund LP

Hopes for a prolonged QE program under the leadership of Janet Yellen – nominated Fed chairperson – has spread optimism globally across commodities. This has resulted in a weakening dollar and higher prices for crude oil and refined crude products like gasoline.
 
The average price of gasoline bounced to nearly $3.20 per gallon from its 33-month low of about $3.17 earlier last week. Immediately following Yellen’s testimony which suggested to many that the stimulus would be kept intact at least for the short term, gasoline price gained almost a penny in last Wednesday trading. This marks the biggest one-day gain since October 16th (read: 3 Commodity ETFs Surging Higher).
 
A rise in global oil prices and refinery issues on the East Coast also supported the rising gasoline price. The rise also spread cheers in the ETF world as the pure play on the gasoline futures market – United States Gasoline ETF (UGA) – was up nearly 4.3% last week. This easily outpaced the gain of 3.31% for Brent Oil (BNO) and 0.38% loss for WTI crude oil (USO).
 
However, this gain looks to be short-lived given the demand/supply imbalances and negative macro fundamentals. The ETF is down over 2% in the year-to-date time frame and more than 6% in the past 90 days. The fund has managed assets of $57.6 million so far.
 
The fund seems on a downtrend based on both technical and fundamental factors described below (see: all the Energy ETFs here):
 
Technical Look
 
The fund currently trades near its 52-week low of $53.35 and its short-term moving averages are well below the long-term average as depicted by the 200-Day SMA in the chart below. This suggests continued bearishness for this ETF.
 
This is further confirmed by the downswing in the Parabolic SAR, although this figure should definitely be monitored closely. Moreover, volume doesn’t look great, probably indicating a low level of interest and additional cost in the form of a wide bid/ask spread beyond the expense ratio of 0.60%.
 

 
Fundamentals
 
The fund provides investors exposure to front-month gasoline futures, tracking RBOB gasoline for delivery to the New York harbor which is traded on NYMEX.
 
As traders need to roll from one future contract to another, it can enjoy the benefits of a roll yield. If the front-month contract is higher than the next-month contract (also called backwardation), the roll yield is positive (read: Gasoline ETF Surges on Refinery Issues).
 
Currently, the gasoline market is in backwardation, which is bullish for the commodity and the gasoline ETF UGA. However, this situation does not look to be sustainable, as the RBOB gasoline futures contract for January 2014 is trading lower than February, signaling negative roll yield (contango).
 
Gasoline Price Outlook
 
Though gasoline prices have shown strong support following Yellen’s QE promise, it is still likely to fall in the coming days on the back of excess supply, resuming production at refineries, sluggish demand and lower crude oil prices. 
 
Gas prices are declining in some parts of the country including eight states, while Missouri saw prices fall below the $3 per gallon mark. Many industry experts expect prices to hit a fresh low to close out the year.
 
Further, the resumption of talks between Iran and six major powers, the U.S., Britain, France, Russia, China and Germany, could ease the decade-long tension over the nuclear dispute. This would lead to an increase in Middle East supply and put pressure on global oil prices (read: Oil ETFs in Focus Ahead of Iran Talks).
 
According to the U.S. Energy Information Administration (EIA), the average weekly gas price has fallen over 40 cents per gallon since the beginning of September. The agency expects gasoline prices to average $3.24 per gallon for the current quarter, $3.50 per gallon for this fiscal year and $3.39 per gallon for the next. This numbers are down from average $3.63 per gallon in 2012.
 
Bottom Line
 
Given the above discussion, investors should take caution while trading in gasoline ETFs or avoid trading completely for the time being. Prices may definitely have further to fall in the short term, so watch out for an end of year drop in this key market.
 
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US BRENT OIL FD (BNO): ETF Research Reports
 
US GAS FUND LP (UGA): ETF Research Reports
 
US-OIL FUND LP (USO): ETF Research Reports
 
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