Forecasting upside for commodities, particularly energy commodities, has become an increasingly difficult task. Making the task all the more trying when it comes to energy commodities is the spate of glum oil forecasts some market observers have for 2016.
Some analysts expect double-digit declines for oil this year, which at this point, is not a bold prediction considering crude prices fell by double digits just last week. Other, more bold forecasts call for oil to fall below $20 per barrel this year.
Those factors and others should not be good news for the United States Gasoline Fund (NYSEArca: UGA), which tracks gasoline futures, but solid gasoline demand, rising auto sales and the possibility of an oil rebound in the second half of this year are seen as potential catalysts for boosting the fortunes of gasoline futures.
Gasoline demand has been surprisingly strong. The falling crude oil prices have also pressured gas prices at the pump, adding to greater sales for gas-guzzling SUVs and longer road trips, Bloomberg reported. The improved economy has added job creation, which means more workers commuting to jobs.
“Bullish investors point to robust demand as a key reason that they expect oil prices to start recovering in the second half of 2016. It’s not just that drivers are hitting the road more, they say. They’re also buying less fuel-efficient vehicles, such as big SUVs, which suggests that demand could stay high for years. In addition, U.S. drivers traveled 2.6 billion miles in the first 10 months of 2015, the highest number for that period on record. And U.S. car sales also hit a record high in 2015, with many consumers opting to buy larger vehicles,” reports Nicole Friedman for Barron’s.
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]
Presumably, higher oil prices would further benefit UGA, leaving drivers to wonder what could have been for their wallets when crude prices were sliding.
“If demand does climb strongly this year, that could prop up oil prices, which dropped to 12-year lows last week. Gasoline inventories held in developed countries are above their levels of a year ago, according to IEA data, but are less elevated than stockpiles of crude oil and other petroleum products,” reports Barron’s.
United States Gasoline Fund