WTI Light Sweet Crude Oil, RBOB Gasoline Price Correlation Analysis

• Posted by scheplick
• on April 19th, 2012

This is a post from Zachary “ZMoose” Musso, a sophomore at Bentley University majoring in Economics & Finance. ZMoose has been passionate about financial markets since 2006, and most recently began trading Light Sweet Crude Oil, S&P 500 E-mini futures, and foreign exchange. In this post, Zmoose breaks down a play in the Oil market. You can contact Zmoose on StockTwits here and on LinkedIn here.

Since President Obama put forth his $52 billion written commitment to put the axe on speculation in the energy commodity derivatives space, the WTI Light Sweet Crude Oil ($CL_F) and RBOB Gasoline ($RB_F) relative price action has been incredibly interesting.  Over the last three weeks, the two commodities have been trading fairly parallel with each other, with a slight hiccup about two weeks ago that resulted in the most recent price decline in $RB_F.  If we take a look at the price action on a 15 minute, 20 day line chart comparing the percentage gains of the two commodities, we can break down the odd activity week by week:

This chart allows us to witness something that happens when volume and price converge, diverge, or move in a similar fashion.  Let’s first concentrate on the price action from April 3^rd and 4^th, the second Tuesday / Wednesday on the chart.  We notice that volume is declining as price is decreasing, and at the end of Monday’s session we see a rather large spike in both the price of $CL_F and $RB_F.  Moving to Tuesday, we see a pullback in $CL_F that has little effect on the price of $RB_F, with the API Data for both RBOB and WTI coming out after the market closed; this data ended up showing a predicted draw in RBOB stocks and a predicted build in WTI stocks.  The following day, as WTI declined into the Asian and European cash sessions with RBOB continuing to hold up, the EIA official inventory statistics were released at 10:30am ET showing a greater-than-expected build in WTI and a less-than-expected draw in RBOB.  The two inventory reports were not a conducive environment for a price gain in either commodity, as both $CL_F and $RB_F declined and $RB_F’s price reverted back to trading parallel with $CL_F’s price.  Before these reports were released, notice that there was a divergence in the price-to-volume relationship, followed by a convergence into the Wednesday EIA report with a drop in $RB_F and $CL_F of approximately 2.00%.

We’re not done yet!  Let’s take a look at the most recent inventory announcement that just hit the wire yesterday and today.  Take a look at the back end of last week, and we see a divergence in the price-to-volume relationship, followed by an immediate convergence and a large spike in volume on Monday.  The Obama energy speculation news surfaced the on Tuesday, with the price (represented by percentage performance) of $CL_F and $RB_F crossing and causing $RB_F to drop off a cliff while $CL_F stayed steady.  Again, the API inventory data was released after hours and showed a predicted draw in RBOB stocks and a predicted build in WTI stocks.  When the EIA report came out, there was a greater-than-expected draw in RBOB inventories with a greater-than-expected build in WTI inventories.  Although the prices of both commodities continued to drop during the overnight session, this is where $RB_F rebounded in a much greater fashion than $CL_F.  Here’s a magnified look of this particular price action:

Here, we see the price rebound in $RB_F to be much more substantial than in $CL_F:  $RB_F increased by about 2.00% while $CL_F only increased by about 0.50%.  The price-to-volume relationship is now showing a divergence because of today’s rebound EIA inventory report rebound.

So, what do we learn from the technical analysis and the macroeconomic factors that play a primary role in this scenario?  Let’s take away two key bullet points:

• As summer approaches, RBOB Gasoline’s macroeconomic picture is becoming a more prevalent focus with regard to comprehending price action in both itself and WTI Light Sweet Crude Oil.
• Every divergence that is noticed with the price-to-volume relationship should be watched closely for a future catalyst in price or a break in the $RB_F:$CL_F correlation.

It’s important that, when trading the energy commodity space, that you continue to watch both the technical analysis and the macroeconomic picture; without a solid grasp as to how they work in tandem, the higher the probability you will lose money!

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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