Erroneous Expectations

Many market observers are probably expecting crude oil prices to enter a seasonal uptrend due the beginning heating season. After all, the heating season in the Northern hemisphere means that energy consumption will rise.

 

barrels-of-oil-1200x900Crude oil – is the price of crude actually strengthening during the heating season? This is what most people would surely expect – but it turns out it isn’t true.

 

The effect of the heating season on demand is however offset by other factors, such as the use of alternative energy sources and fixed prices agreements made in advance. The question is: what is the actual seasonal trend in crude oil?

Contrary to what one would expect, seasonally, the oil price  is set to decline between mid October and mid February. Below we show the actual seasonal trend of the spot price of the most important oil grade West Texas Intermediate (WTI) based on a seasonal chart.

A seasonal chart shows the average trend in prices in relation to the time of the year. The horizontal axis depicts the time of the year, the vertical axis shows the average price move of the past 30 years as a percentage. The seasonally weak period from mid October to mid February is highlighted on the chart:

 

1-crude-oil-30-year-seasonalCrude oil (WTI), seasonal trend over a 30 year time period. The heating season encompasses the seasonally weak period for crude oil! – click to enlarge.

Source: Seasonax

 

Contrary to what many market observers expect, crude oil prices typically decline during the heating season. In other words, sometimes, widespread expectations are not fulfilled – which is one more reason to always closely examine actual seasonality.

 

Crude Oil Declines between October and February are often Dramatic

The weak season highlighted in dark blue in the chart above lasts from October 12 to February 11 of the next year. The average decline in crude oil over this time span was 8.67 percent. In 17 out of 30 years crude oil fell, while it rose in 13 years.

On four occasions crude oil actually plummeted by more than 25 percent during this time period: by 43.07% in 1990, by 55.73% in 2008, by 43.08% in 2014 and by 44.38% in 2015.

The following bar chart shows the price movements of all years since 1986 in the time period October 12  – February 11.

 

2-crude-oil-detailed-statsCrude oil, return in percent between Oct. 12 and Feb. 11. since 1986. Crude oil often declines very strongly between October and February.

Source: Seasonax

 

The red bars represent losses. The are dominant both in number and extent. This makes clear that it is not only a single outlier that has created the weakness in the seasonal chart.

Rather, quite strong price declines in crude oil have indeed frequently occurred in the time period from October to February. The price trend is seasonally weak right in the middle of the heating season!

Exploiting seasonal trends that deviate from general expectations can be highly profitable.

 

Dimitri Speck specializes in pattern recognition and trading systems development. He publishes the website www.SeasonalCharts.com, which features free-of-charge seasonal charts for interested investors. In his book The Gold Cartel (see link on the right hand side), commodities expert Dimitri Speck discusses gold price manipulation and modern-day credit excess. His commodities trading strategy Stay-C has won awards all over Europe. He is the publisher of the web site Seasonal Charts as well as of the Bloomberg app Seasonax.

 

Addendum by PT:

The charts above were made with the Seasonax App that is available on Bloomberg and Thomson-Reuters terminals. We will soon post additional information on seasonal market trends and the Seasonax App, which at the moment is to our knowledge the only means of generating perfectly calendar-accurate seasonal charts.

 

 

 

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One Response to “Crude Oil Has Entered a Seasonal Downtrend”

  • wrldtrst:

    That read like a Street and Smith NCAA basketball prediction magazine. “7 of the last 9 times Oral Roberts played Tulane, at home, on a rainy day, they covered the spread.”

    By he way. Your heating should make crude rise expectation. Have you ever heard of a crack spread?? Summer drop off in driving needs and gasoline?

    Just awful.

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