Oil refineries separate out the different chains by heating the crude oil to different vaporization points, and then distilling the resulting vapors. Gasoline is a mixture of those https://www.day-trading.info/global-financial-risk-management-firm/ hydrocarbon chains with boiling points below that of water. These different chains are blended together in various proportions to provide a consistent product for motor fuel.
Prices for RBOB gasoline futures logically have a high degree of correlation with crude oil since gasoline is distilled from crude. Thus, some of the global supply and demand factors for crude oil also apply to RBOB. From an investing perspective, RBOB gas is important because it’s the benchmark for gasoline futures. So this may give you some insight into what retail gas prices will be in a few days.
The term crack spread describes the difference between the value of gasoline and crude oil. This activity is known as the downstream process of oil and gas companies. In the refining process, crude oil is heated and introduced into the distillation tower.
If a position is not liquidated, the holder of a long contract might be responsible for taking delivery of 42,000 gallons of gasoline. It is safe to say that most investors do not want to take https://www.topforexnews.org/news/how-to-start-a-cryptocurrency-exchange-steps-and/ physical delivery of that much gas. Thus, investors must be aware of the different deadlines for futures contracts and offset any positions before the risk of delivery comes into play.
As a result, weather events or supply congestion in that area can cause short-term delays or price spikes. RBOB is Reformulated Blendstock for Oxygenated Blending, a mix of petrochemicals intended to be mixed with ethanol to produce finished motor gasoline. Additionally, RBOB price changes lag a few days behind the price you pay at the gas station. So, keeping an eye on RBOB prices can give you a sense of where retail gas prices are headed.
- Drake considered gasoline a useless byproduct of the distillation process and discarded it.
- Each fraction has molecule chains of different lengths, and each of these chains has a different boiling point.
- Gasoline itself was not invented, but rather was discovered as a by-product of the production of kerosene and the refining of crude oil.
- To generate an “apples to apples” comparison, the crack is quoted in US dollars per barrel.
- Cracking is a process whereby hydrocarbon molecules are broken up by heat and pressure into lighter molecules.
- The cost to generate gasoline is the value of crude oil plus the distillation process.
The boiling process produces gasoline as well as other products including kerosene and diesel fuel. Crack spreads are a way to measure the margins for refining crude products and can serve to predict how tight the supply of products is in different markets. RBOB became the benchmark in the United States largely because of legislation banning gasoline with the chemical MTBE which was found in unleaded gas prior to legislation. MTBE was tied to the pollution of groundwater which threatened the health and safety of humans and wildlife. Since the legislation was introduced in the United States, RBOB futures has even become the new benchmark gasoline futures contract. The margins on calendar spreads are lower because the two contracts have a high degree of correlation and generally move in the same direction.
What is Brent Crude Oil?
This requires refiners to substitute more expensive components into gasoline. California is the largest gasoline-consuming state with over 15 billion gallons consumed every year. Low Volatility ETFs invest in securities with low volatility characteristics. These funds tend to have relatively stable share prices, and higher than average yields.
Example of RBOB Gas
Brent Crude is extracted from the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes. The Middle East used to have a stranglehold on the top ten producers worldwide, but the U.S. recently surpassed the region’s output. For the most part, this list contains both emerging and frontier markets, which is what makes gas prices so volatile. RBOB is a “BOB” (before oxygenate blending) because it is formulated for subsequent blending with 10% ethanol to form the final gasoline blend that is marketed to end users. RBOB stands for Reformulated Blendstock for Oxygenate Blending, a component that is used to create reformulated gasoline. As a result, around 30% of the U.S. market requires gasoline to be reformulated.
What is RBOB Gasoline?
The price for the RBOB gasoline futures contract is quoted in U.S. dollars and cents. The minimum price tick for RBOB is 0.0001, equivalent to a movement of $4.20 for one contract. RBOB Gasoline futures are traded on the Chicago Mercantile Exchange, with prices quoted in U.S. dollars and cents per gallon under the symbol RB. A single contract represents 42,000 gallons with a minimum fluctuation of $0.0001 per gallon. Listed contracts conduct trading throughout the next 36 consecutive months.
Edwin Drake, the first American to drill for oil, discovered gasoline by accident when he was distilling oil to make kerosene for heating. Drake considered gasoline a useless byproduct of the distillation process and discarded it. There isn’t an easy way to invest directly in RBOB gas with stocks or bonds, but you can invest in energy sector stocks and bonds affected by the same economic forces. There are also options for energy-related ETFs focused on oil and natural gas.
Cracking is a process whereby hydrocarbon molecules are broken up by heat and pressure into lighter molecules. There are various forms of this process, including thermal cracking (the most popular) and catalytic cracking. Other production/refining methods include polymerization, alkylation, and isomerization. Gasoline itself was not invented, but rather was discovered as a by-product of the production of kerosene and the refining of crude oil. It was thrust into popularity with the introduction of automobiles, which had the option of using various fuel sources, but ultimately settled upon gasoline for its strong combustion properties. Since then, numerous developments have improved the quality of gasoline as it is refined from crude oil all over the world.
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The RBOB / Brent crack spread describes the difference between the price of RBOB gasoline and the price of Brent crude oil. RBOB Gasoline is quoted in US cents per gallon and Brent crude oil is quoted in US dollars per barrel. To generate an “apples to apples” comparison, the crack is quoted in US dollars per barrel. To create this quote, RBOB gasoline is converted into US dollars per barrel. This can be accomplished by multiplying RBOB gasoline by 42, which converts the cents per gallon quote into a US dollars per barrel quote. You can then subtract the price of Brent crude oil from the price of RBOB gasoline to derive the crack spread.