We have heard a lot about the market’s seasonality lately, that favorable period from November to April
where the investment returns are at their heights. Does this apply to Oil?
Crude oil tends to start off at the low end, then rise through the spring – possibly in anticipation of a
robust demand for gasoline distillate during the peak driving summer season. A peak is regularly seen in
late summer or early fall (possibly due to hurricane season winding down, assuming the absence of any
other supply shocks).
Often, it revisits early year lows later in the year.
For example, look at 2022:
It started the year at $78 a barrel, rose through March to $129 as the CPI printed higher. After a leveling
off for a few months it rose again, it fell short of that high in June at $123 and then ended the year near
where it started at $72.
Quite a volatile round trip; it went coast to coast, as they say.
Without many people commenting on it as I would have expected, 2023 has played out in a similar
fashion.
How about our day-to-day lives? Does gasoline follow crude in lockstep?
Gasoline is a key downstream product that is very sensitive to changes in supply and demand, with the
emphasis on supply, in my opinion. Prices at the pump were headline news for much of the past year or
so, perhaps the most headline-grabbing component of the CPI and PPI.
As we can see in the chart of gas prices below, the correlation between it and crude oil is extremely
high:
Traders in crude might take positions soon at these seasonal lows, going in with a mindset of looking to
take profits in the spring.
Geopolitics is the X factor here. Easing of war tensions could result in falling pricings, while rising
tensions could cause upward spikes, of course.
The unpredictability of these events leaves us on thesidelines with no major energy commitments present. If your inclination is to capitalize on these
patterns, keep your eyes open for bottoming action.
What do we mean by that?
I like a rising column of X’s to exceed a prior rising column as sign that demand is indeed taking over.
Unfortunately, crude’s fall has been so steep and fast that no such level exists until all the way up in the
mid-90’s.
For us, a more actionable outcome might see a 3-box reversal into Xs up to, say, $78, a decline into O’s
that does not exceed a previous low, then a reversal back into X’s – preferably one that exceeds the
prior rising column. This would result in both a lower entry point, plus a clear stop-loss point for traders.
At the moment, those trying to bottom-fish the recent decline in crude are merely guessing. Best they
can do is take a stake and use a stop of somewhere just below $66, which would violate a triple bottom
on a Point and Figure basis.
In short, seasonality should be in favor soon for those hoping to do some nibbling in the crude oil patch.
However, with fundamentals unclear at the moment, more basing action would greatly improve traders’
odds of success.
