The United States Gasoline Fund (NYSEArca: UGA) has tumbled more than 17% over the past 90 days and the exchange traded fund’s decline does not appear poised to end there.
ETFs, like UGA, that track front month contracts benefit from backwardation as they roll front month contracts to avoid physical delivery of the commodity. When the contract is about to expire, UGA sells the futures contract and buys a cheaper later-dated contract in a backwardated market at a profit. [How Contango Can Affect Your Commodity ETF]
Looking ahead, oil observers expect the supply and demand dynamic to become more balanced in 2016. The Organization of Petroleum Exporting Countries also projected rising demand for oil this year and the next, which could “imply an improvement toward a more balanced market.” [Oil ETFs Look to Rally]
However, gas prices are slumping alongside crude prices. Some regions of the U.S. could see unleaded gas fall well below $2 per gallon. That is good news for drivers but no so much for UGA.
“Spot gasoline in the Midwest market was selling at a low of just under 93 cents per gallon Monday, the lowest level since March, 2009, according to Tom Kloza, global head of energy analyisis at Oil Price Information Service. The spot market is where distributors shop for product, and that should ultimately translate to a lower price for retail customers at the pump,” reports CNBC.