Gasoline prices are directly correlated with crude oil prices, which exhibit significant volatility. These price fluctuations can severely impact producers or consumers of gasoline. To protect these market participants from volatility, gasoline futures were introduced.
Gasoline producers and consumers like to use futures to hedge against inflation. Producers minimize the risk of price fluctuations in the gasoline market by using a short hedge. They short (sell) futures to lock in a fixed selling price for their ongoing gasoline production. This way, they will get the specified amount in the contract, for their gasoline, even if prices were to fall by the time the gasoline was ready for delivery. Conversely, consumers (gas stations) can use a long hedge (buy enough futures to cover the cost of the gasoline to be produced) to lock in a fixed purchase price for the specific quantity of gasoline that they will require in some time in the future.
Gasoline futures are also traded by speculators who assume the price risk that the hedgers are trying to avoid. Speculators have no vested interest in the underlying asset, that is, they will neither deliver gasoline nor take delivery for gasoline. They trade in and out of gasoline futures only based on speculations about the price fluctuations of gasoline over the trading period. Gasoline speculators buy gasoline futures if they believe that the price of gasoline will go up, and sell gasoline futures if they believe that the price of gasoline will go down.
Gasoline Futures Contract Details
Gasoline futures are traded on the New York Mercantile Exchange (NYMEX) in the U.S. On the NYMEX, a single gasoline future (symbol “RB”) is for 42,000 gallons, quoted in U.S. dollars and cents per gallon. The contract is traded throughout the next 36 consecutive months, and has a minimum fluctuation of $0.0001 per gallon along with a physical settlement.
One of the biggest hubs of gasoline futures is the Tokyo Commodity Exchange (TOCOM). It lists gasoline futures with a standard contract for six consecutive months, of 13210 gallons (50 kiloliters), quoted in yen per kiloliter. These physically delivered futures contracts are traded electronically and have price fluctuations of
JPY 10 per kiloliter.