Gas prices aren’t the only factor fueling used EV sales

New EV sales fell ~28% year-over-year in Q1 after the removal of the $7,500 consumer tax credit, while used EV sales rose 12% YoY and 17% QoQ, per Cox Automotive. Rising gasoline prices (above $4/gal) and a surge of expiring leases (EVs expected to be 15% of off-lease vehicles by year-end vs 7.7% in Q1) are increasing used EV supply and demand. The influx of pre-owned EVs has pushed prices down to near parity with ICE vehicles (average used EV $34,821 vs $33,487 for gas equivalents).

Analysis

The dominant dynamic is not a consumer preference switch but a supply shock from a concentrated wave of off-lease EVs that will hit the retail channel over the next 6–12 months. That influx compresses used EV spreads versus ICE equivalents, forces deeper certification/warranty scrutiny, and shifts margin pools from OEMs and captives toward players that can cost-effectively recondition, market and finance high-voltage vehicles.

Second-order supply-chain effects are asymmetric: near-term demand for new battery cells and upstream materials faces a transitory soft patch as OEM production plans and order cadence get re-optimized, but medium-term demand remains intact if total EV adoption continues. Conversely, providers of battery diagnostics, repurposing/refurbishment and recycling stand to see outsized growth because residual-value risk is driving buyers to certified and warranty-backed offerings rather than informal private sales.

Key catalysts to watch that can reverse or amplify the move include fuel-price trajectory, a policy reversal on purchase incentives, and OEM/captive guidance on residuals and buyback programs. Monitor wholesale-to-retail spreads, battery health statistics on returned leases, and captive finance write-downs — each will give a 1–3 month lead indicator of whether the used-EV market is normalizing or continuing to undermine new EV volumes.

Key Decisions for Investors

• Long CarMax (KMX) 3–6 months: buy shares or 3–6 month call spread — rationale: scale in omnichannel used-car retail + reconditioning gives pricing power as off-lease EVs homogenize inventory. Target +20% upside if wholesale spreads stabilize; downside -12% if macro retail collapses.
• Pair trade — Long Li-Cycle (LICY) 9–18 months / Short Rivian (RIVN) 6–12 months: expect recyclers/refurbishers to capture value from returned batteries while early-stage OEMs with weak balance sheets and high exposure to retail EV demand face margin and production risk. Risk/reward asymmetry ~3:1 skewed to recycler optionality vs OEM downside.
• Short selective new-EV OEM exposure (e.g., LCID/RIVN) 6–12 months via puts or outright short — entry on any relief rally or weak monthly registration prints. Hedge with a small long position in broad auto dealers (KMX) to preserve downside protection.
• Event monitor and protection: buy 3–6 month puts on captive-finance-sensitive names (GM) or set alerts on captive reserve disclosures — a marked increase in residual losses would be a rapid catalyst to widen credit spreads and pressure equity; size protection at 2–3% portfolio risk.