The front month July RBOB gasoline contract has been under pressure in recent sessions and could be in the midst of a key reversal. The market has run into some significant resistance around the $1.88 region and could potentially be headed for a retest of the recent congestion zone around $1.63.
Not surprisingly, the recent move lower in gasoline prices coincides with weaker crude oil prices. The front month CME crude contract for July delivery has also been under pressure in recent sessions, and appears to have put in a near-term top after closing underneath $60 per-barrel. A congestion zone is starting to be seen in between $52 and $55.
The gasoline market is currently facing a variety of headwinds that could weigh on prices. The ongoing U.S./China trade war is already having an impact on the economies of both countries. After nearing a deal in recent weeks, talks fell apart and both sides have pushed away from the bargaining table. The U.S. has since raised tariffs on $200 billion of Chinese goods from 10 percent to 25 percent while China has raised tariffs on $60 billion of U.S. goods. With no agreement in site, the war over trade could add to the current economic slowdown, reducing demand for gasoline and other commodities.
Crude oil inventories have risen in recent weeks, swelling by nearly 5 million barrels, the highest level since July 2017. Gasoline stocks posted a surprise rise as well, climbing by 3.7 million barrels.
Gasoline prices may have already reached a driving season peak and could potentially remain under pressure as long as the trade war continues.
The ongoing U.S./China trade war as well as U.S./Iranian tensions could potentially move the market significantly in either direction. Although the trade war is likely to remain a bearish catalyst for prices, any further escalation between the U.S. and Iran could potentially send crude oil higher, and gasoline along with it.
The switch from winter-blend to summer-blend fuels is also likely having an impact on prices. In an effort to reduce pollution, summer-blend fuels use different oxygenates, or additives. The summer grade fuel is more expensive for two reasons: First, because of the ingredients it contains. Second, because refineries are forced to shut down to make the switch. The seasonality factor may keep a floor under prices, however, a slowing economy and concerns over demand may outweigh such factors causing prices to potentially trend lower.
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