Seasonality of Crude: Buy in March, Sell in May

Overview:  Crude Oil & Gasoline Seasonal Tendencies
As we start this new year, a number of events are likely to occur along with the normal changes in the weather. January gasoline is typically the lowest in any year and, despite the common mythology, gasoline consumption does not normally fall steeply after Labor Day and then recover miraculously after Memorial Day.
We do see an element of driving disappear after Labor Day, as drivers in the 16 to 25 year-old age bracket tend to drive less, or at least more predictably. Family vacations are also over by that point, as a general rule. But, there are pockets of demand during foliage sighting season and Thanksgiving Weekend is always the best four-day driving period in any year in which July 4th does not fall on a Tuesday or Thursday.
There is usually good driving through the month of December into New Year’s Eve, but it traditionally falls off a cliff right after the champagne glasses touch to ring in a new year. People park their cars and drive to work and school and to appointments. But it is not until March or April that more discretionary driving normally returns.
Refineries know this and they typically plan maintenance turnarounds from January through April or early May. During this period, there is a definite tendency for gasoline inventories to be drawn down; even though demand starts the year at its lowest levels, the maintenance usually goes on long after demand has started to mount a comeback.
Market Reaction
The market reaction is not what most people might believe. Regardless of the overarching trend, prices have a long history of advancing from early March through the middle of May. Despite the fact that the so-called “Driving Season” starts with Memorial Day and peaks on Independence Day, most of the buying has come into the market long before the end of May.
Gasoline Seasonal Trade
We are now trading “RBOB,” but it is effectively “unleaded gasoline,” and we include its history in all its various incarnations, from leaded regular to unleaded to oxygenated to RBOB. The tendency for prices is to advance from early March. Following the loose guideline of buying in the first two weeks of March and selling sometime before May 15th, the seasonal tendency has worked in 25 out of 26 years - or 96.15% of the time. It is the strongest and most reliable seasonal tendency of any commodity futures contract.
Over the years, various specification changes seem to have helped. In 2003, prices rallied through March - in the leadup to the invasion of Iraq on March 19th of that year - and they then dropped into May. We advised against following this seasonal that year, as we saw prices advancing in January and February as it became clear that war with Iraq was coming.
Despite 2003, buying in March has yielded profits consistently. The buying part is a great deal easier than the selling part, but profits are there to be realized if one uses money management techniques and starts to take profits as soon as prices get overbought in May.
The following table shows whether one could have bought June gasoline futures on March 1st and then have been able to sell it at a profit at some point in the first two weeks of May. As one can see, there were profits available in May every year except 2003.

Tactical Variations   
One of the best variations is to buy on March 1st, and sell 50% on May 1st and 50% on May 15th.  One can use any system that buys in early March and sells later.  One can start selling at any time after April 1st.  The table below shows the profit and loss figures for the March 1st to May 15th period, taking half profits on May 1st and half on May 15th.  Four of the last five years have been spectacular, with the four largest gains coming in the four years between 2006 and 2009.

The following table shows the result of buying on March 1st and selling half on May 1st and half on May 15th, or on the days closest to these dates.

Using that system rigidly, there would have been profits in 23 out of 26 years for a net gain of 10.59 cents a gallon or $4.447 a year.  If one had placed this trade every year, one would have made or $115,626 per contract before commissions and fees, including the 20 cent loss in 2003.  If we remove that year, when we did not recommend this trade, there would have been average yearly profits over 25 years of 11.83 cents, or $4,969.60 per year – on one contract.  The accumulated profits over 25 years would have reached $124,240.20 before commissions and fees.

Six of the last eight years have yielded profits of more than 20 cents a gallon.  In 2005, it would have lost two-hundredths of a cent.  We recommended NOT doing this in 2003, because prices had rallied strongly leading up to the March 19th invasion of Iraq. 

Every year, our biggest fear is that too many people know about this trade for it to keep working, but this trade’s track record is second to none in commodities trading.  We are not sure what to do this year, with the current unrest in the Middle East.  The unrest could help or it could give us an early top.  We still have a couple days to decide whether to recommend the trade or to suggest traders avoid it. 

If we do recommend it, from a money-management perspective, one absolutely must pick a point at which one would admit to being wrong.  This needs to be viewed within the broader framework of being a trade one would commit to making each year for the next five or ten years.  If this year does not work, for any of a number of reasons, we must be in a position to try again next year and in the years that follow, to bolster our chances to make this strong seasonal tendency work for us over time. 

Viewing this as a one-time trade to be made just this one year, in a way that could leave one’s business vulnerable and unable to try again in following years would be a dangerous mistake.  The fact that it has worked in the past is no excuse to bet the ranch on it now.  It is simply a tool to be used – on a continuing basis – to increase one’s chances of long-term success in a business that has become more volatile and complicated.  Regardless of the results in 2011, this cannot be judged by the results of a single year or even two or three years, but must be viewed over an extended period.  One must trade this accordingly.

Because of the risks that such a trade entails, some traders may be better served by buying call options, in which the risk can be identified and limited ahead of time. 

Beyond May
While the trades outlined above take advantage of the seasonality from March to May, there is a general tendency for oil prices to advance through the summer as well.  This is more prevalent in crude oil than in refined products, and gasoline prices tend to see their highest prices in mid-May.  They do often move higher, though, from Independence Day into autumn, although here, as well, the trend is more firmly established in crude oil. 

In the case of both refined products, we tend to see yearly highs ahead of the season during which their demand reaches its peak.  As we move through summer, part of the strength in crude oil is lent to it by heating oil, which most often peaks in mid October.

Crude Oil Summer Seasonal Tendency
Recent years have confused a tendency that used to exist for prices to weaken from the end of May into early July.  But the tendency of prices to rally from early July to some point before the end of summer does still work.  Using the table below, we are defining success in those cases where one could have purchased October crude before July 15th and been able to sell it at a profit at a point before the end of summer, defined here as September 15th.  Check-marks in the left-hand part of the column suggest it was best to sell on August 1st.  Check-marks in the middle of the column suggest one could have held out until September.

The check marks that are aligned to the left signify years that one could have made profits, but would have sold on August 1st.  The center-aligned check marks are for years in which one would have made profits by selling in September, although in some cases one could have also made them earlier.  Based on our very loose rules, one could have made a profit by skillfully buying before July 15th and selling somewhere between August 1st and the end of summer in 24 of the last 28 years.  This shows a general trend higher through the summer.

One can see in the chart above a marked tendency for prices to advance through the end of the first quarter into the second quarter.  The year 2003 needs to be viewed differently because of the lead-in to the war in Iraq.  In a number of these years, it might have been better to buy in December or even January, but over the full history of trading in the gasoline contract, buying in the first two weeks of March and then taking profits before the middle of May has been the most consistent system seen.

Conclusions
While there is a general tendency for gasoline prices to rise from some point in December, January, February or March to a point in May and then possibly from July to September, the most reliable pattern is the one that sees prices advance from early March to the middle of May. 

The worst months to be long gasoline would seem to be June, October and November, with the first half of December added into November. 

Retailers should integrate a policy of buying caps or calls on product in early March, to be held into May, and may want to buy, less aggressively, around Independence Day, with a view to holding a long bias position through the end of summer.  The only way to approach this trade is as a multi-year campaign, rather than as a single-season “bet” that will either make or break one’s business.  One needs to be prepared to take this approach year in, year out, over a period of five, 10 or even 15 or 20 years. 

Gold and Its Seasonal Aspects

from tradersnarrative.com:

At the start of the month we looked at several reasons why gold’s recent correction was over. When both technical and sentiment indicators align as they did, we usually see a high probability setup.
Since I wrote that analysis gold has steadily climbed higher, from $1185 to $1232. To be fair, gold bottomed out a few days before, in late July. Conceding that I missed the exact low, the call was a good one and continues to be. But if you were long gold for this recovery, there are a few reasons you might want to start looking for good areas to lighten up those positions.
The Rydex Precious Metal fund has been slowly recovering from the massive exodus it suffered last month. Both price and net assets bottomed at $63 and $102 million (respectively) in late July and have since then climbed steadily but slowly. But as you can see from the chart below, based on net assets, there is still no real speculative fervor for gold from Rydex traders.
Click to see larger chart in a new tab:

Sentiment
Another positive factor was the Hulbert newsletter sentiment for gold. Like the Rydex data, the Hulbert Gold Newsletter Sentiment index has also recovered from its low in late July. From a low of 9.2%, it has jumped almost 36% points to 44.9%. This level of optimism is middle of the road for the HGNSI since we saw it climb to 68% in late 2009 as gold prices peaked in a parabolic blowoff.
Gold Seasonality
While the above is mildly negative for gold, there is an important factor that may just tip the scales back for the bulls. We are about to enter within a few weeks, the strongest seasonal time for gold. I’m not sure why exactly but the end of August and the beginning of September marks the start of the most positive period for gold in the year. I’ve mentioned this before - for seasonality charts, see: Gold About to Get Seasonality Super Boost and Gold Seasonality Turns Positive.

The most logical explanation is the wedding season in India which begets torrential buy orders of physical gold. Whatever the reason, in the past 20 years, gold has had a positive month in September 80% of the time. That kind of an edge is not something you want to bet against. So while it is prudent to have one eye on the exit, gold could maintain its momentum and use the positive seasonality boost provided by September to break free from the $1250 resistance that has been pushing it back so many times before.
Click to see larger chart in a new tab:

The obvious resistance level at $1250 is fast approaching. One possible scenario would be for gold to have a brief correction in the short term. If it is shallow but serves to shake off the gathering bullish sentiment, then we could set up for real breakout and see new highs.
From a technical point of view, this is realistic since gold is not overbought yet. The relative distance from its 200 day moving average shows that while gold has risen recently, it still has a lot of room to run. This is clearer still when we compare today’s technical picture with that of May 2010 or November 2009.

With Crude Oil at $82.50 Now, What Will Summer Bring?

I'm worried that the US economy could take another oil-related hit this summer. With prices reaching about $82.50 yesterday, and the summer driving season ahead of us, what will happen when peak gasoline consumption hits this summer? Typically, oil/gas prices rise beginning in late March, in anticipation of the higher demand during summer months. If this happens, then we could see crude oil prices of $100+ per barrel this summer, and this type of price rise in 2008 was a significant contributing factor to the collapse of the US economy in late summer 2008.
This is also particularly striking this year because the Dollar has been rising due to concerns about burdensome debt in the Eurozone, especially in Greece. If the price of crude is strong, even in the face of a strong Dollar and winter usage, what will happen in summer, and what will be the economic effects?

Natural Gas Seasonal Factors

This year, natural gas prices peaked on 12/29/09, but only drifted marginally lower. Prices started to fall significantly on 2/18/10, and have been dropping ever since. In looking at past years, there is also typically a rise in prices in early September, with another dip around Thanksgiving, with prices rising again in late December. This could all be, and may even likely be, a response to weather forecasts showing colder or warmer winters.

Impact of Upcoming USDA Report on Prices

Over the past few days, grain prices have been quite bearish in anticipation of this morning's USDA report of this past falls' harvests.

Grains Close Higher On Last Trading Day Most Years

Grains are all higher today, appear to be on cusp of closing higher. This is typical for grains on the last trading day of the year. Arlan tweeted, "Soybeans settled higher on the last trading day of the year in 6 of the past 7 years. Wheat leans that way, but more mixed history. Corn settled the last trading day of the year unchanged in 2002 and settled higher the last day each year since."

Seasonal Firming Typical for Dollar

Usually the dollar firms up during Nov. It's basically done that: Look at what Dec brings for the dollar.

Wow! December looks like it is typically a bloodbath for the Dollar.

Gold Buyers Enter 1st of Each Month

Another technical trader pointed out to me this morning that when money hits the market at the beginning of each  month, gold rises. Note that gold showed weakness toward the end of the month, but rose at the beginning of each month.

Seasonal Gold

Looking at the seasonal chart for gold courtesy of 321gold via Moore Research at www.mrci.com you can see what has transpired in the past September to October period, on average, over the past 34 years; a huge September rally followed by decline in October that retraces about half that rally. Look closely and you will see the average October decline began around the end of the first week in October. Today is October the 7th.

Wheat: Flat in July, Down in August

This has been a good year for both the winter and (so far) spring wheat crops. Wheat is cheap. Corn too!

Wheat: Up in May, Down in June, August

Natural Gas Seasonal Factor

This chart is from the EIA (Energy Information Administration, an agency of the U.S. government), and shows the seasonal pattern for natural gas storage. Prices would obviously move in the opposite direction. Storage capacity tends to peak around October, with gas in storage falling after that. It tends to begin rising again about April when Spring arrives and consumption of natural gas for heating wanes. This is no doubt due to winter consumption. The gray area is the five-year average range, and the red line is the current year's value.

Crude Oil Declines $10 In One Week!

Worries that we may indeed be headed for a depression has caused crude oil to continue falling. We are down $10/barrel in one week! We're now well below $64/barrel. In 2008, crude oil topped out at around July 4th as well.

Treasury Rally May Fizzle

I was unaware of the seasonal aspects to trading treasuries. This is interesting! So far there is no evidence that the summer rally in treasuries is waning, but I will keep this seasonal aspect in mind for future reference.

(Bloomberg) -- One of the best bets in the $6.45 trillion Treasury market may no longer be such a sure thing.

Yields on benchmark 10-year U.S. notes fell from June through September in 15 of the last 20 years by an average of 35 basis points as the U.S. wrapped up the bulk of its debt auctions and investors reinvested the proceeds from interest and coupon payments. The last time yields failed to decline was in 2005, when they rose 34 basis points as the Federal Reserve boosted interest rates.

Investors anticipating another “summer rally” may be disappointed as Treasury Secretary Timothy Geithner accelerates debt sales to finance a record budget deficit. After more than doubling note and bond offerings to $963 billion in the first half, another $1.1 trillion may be sold by year-end, according to Barclays Plc, one of the 16 primary dealers that are obligated to bid at Treasury auctions. The second-half sales would be more than the total amount of debt sold in all of 2008.

“I used to be a believer,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, and has worked in the bond market since 1978. “The amount of Treasury debt that needs to be financed is a game-changer. Normally the seasonals work because of the ebb and flow in terms of the Treasury’s needs. That is no longer the case.”

Favoring Company Debt

Pollack is reducing his Treasury holdings in favor of corporate bonds on the expectation the difference in yields between company and government debt will narrow, he said.

Investment-grade corporate debt yields 3.31 percentage points more than Treasuries, almost triple the average for the decade before the credit markets seized up in 2007, according to Merrill Lynch & Co. index data.

The seasonal rally Treasuries is akin to the stock market adage of “sell in May and go away,” where traders pared back on equities on the expectation that most of the gains come early in the year, said Thomas di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors.

The absence of a rally this summer will be particularly troubling for investors, who have suffered the worst year on record for Treasuries. The securities lost 4.46 percent through June, according to Merrill Lynch & Co.’s U.S. Treasury Master index. The index rose 14 percent last year as the global economy lapsed into the worst recession since World War II.

Lost Year

Even if yields stayed constant for the remainder of the year, investors would still realize an annual loss for just the third time since Merrill Lynch started calculating returns in 1978. When Treasuries fell in 1994 and 1999, it was because the Fed raised interest rates.

The yield on the benchmark 10-year note fell four basis points, or 0.04 percentage point, last week to 3.50 percent, according to BGCantor Market Data.

Yields reached a high for the year of 4 percent on June 11, up from the record low of 2.04 percent on Dec. 18. They will end the third quarter little changed at 3.48 percent before rising to 3.63 percent at year-end, according to a Bloomberg News survey of 65 economists that gives the most recent forecasts given the heaviest weighting.

Money flows, such as the reinvestment of Treasury coupon payments every August, are typically responsible for the usual strong summer performance of bonds rather than diminished supply, said James Caron, head of U.S. interest-rate strategy in New York at primary dealer Morgan Stanley.

Treasury Payments

Investors will receive $30 billion in interest payments and $80 billion from maturing debt in August, according to the Treasury.

“There’s no reason to believe the pattern will not hold until it doesn’t,” Caron said. “It tracks the seasonality of the investment” into Treasuries, he said.

Caron said he expects 10-year yields to “grind lower” to the end of September, before rising to 4.25 percent at year end.

“I’m not so sure I would want to hang my hat on a seasonal pattern that has held true year after year after year, because the world has changed,” said Ray Remy, head of fixed income in New York at primary dealer Daiwa Securities America Inc. “I’m paying a lot less attention to it than I have in the past.”

Bond Auctions

The U.S. will conduct four auctions next week for the first time since the Treasury began issuing securities regularly in 1976. Today’s $8 billion auction of 10-year Treasury Inflation- Protected Securities will be followed by the sale $35 billion of 3-year notes tomorrow, $19 billion of 10-year notes the next day and $11 billion of 30-year bonds on July 9.

Demand has been rising at the sales, especially from the class of investors that includes foreign central banks.

Those investors, which the Treasury labels as “indirect bidders,” bought 67.2 percent of the record $27 billion in seven-year notes sold June 25, or double the amount at the prior sale in May. The ratio was also the highest since 2004 at the $37 billion auction of five-year notes the day before, while the $40 billion in two-year notes offered on June 23 attracted the most indirect bids in at least six years.

Demand for the 10- and 30-year debt may not be as strong given the gains in Treasuries after the 10-year yield reached 4 percent, said Michael Devlin, who trades the two securities for primary dealer Jefferies & Co. in New York. Each issue is also a so-called reopening of the securities originally sold in May.

‘Risks’ to Rally

“Given all the fundamental factors and supply this time around we are more careful when it comes to putting too much weight” on a rally, said Michiel de Bruin, who helps manage $27 billion as head of European government debt in Amsterdam at F&C Asset Management Plc’s Dutch unit. “This year the risks are that we will have a further economic recovery in the second half of the year, and together with supply it’s putting downward pressure on prices.”

President Barack Obama has pushed the nation’s marketable debt to an unprecedented $6.45 trillion from $5.75 trillion in January. The budget deficit is projected to quadruple to $1.85 trillion in the fiscal year ending Sept. 30, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office. The U.S. sold a record $104 billion in 2-, 5- and 7-year notes two weeks ago.

The Treasury will sell $2.07 trillion in debt this year, with $1.53 trillion in net supply after redemptions, compared with $921 billion in auctions raising a net $373 billion last year, according to Michael Pond, an interest-rate strategist in New York at Barclays.

‘Different’ This Year

“This year may be a little bit different given the supply, the budget deficit and the Fed,” said Richard Schlanger, who helps invest $13 billion in fixed-income securities as vice president at Pioneer Investments in Boston. Seasonal patterns had factored into Schlanger’s trading “in the past” though it won’t this year, he said.

As part of a plan to keep borrowing costs low throughout the economy and absorb some Treasury issuance, the Fed has bought $190.7 billion of U.S. notes and bonds beginning March 25. The central bank said it would buy as much as $300 billion of the debt in its March 18 policy statement, and has declined to add to that commitment after its meetings in April and June.

“The Fed being done with its buying program may preclude a lot of portfolio managers from buying,” said Schlanger, who stopped buying Treasuries in May after the Fed declined to add to its purchases in April. “The bias still is for a steeper yield curve and longer-term Treasuries rising in yield.”

Corn Crumbles

from Bruce Knorr:
Bulls in the corn trade cursed outside markets over the fall and winter, when each day seemed to bring reminders that supply and demand were mere bit players in a larger drama. But last week bulls could have used some outside influence. While other markets were looking stronger, corn suffered. Where are your friends when you need them?
Corn appeared to be falling under the pressure of its typical seasonal trend. While rain from a slow moving weather system will slow fieldwork early the week, overall the pattern appeared to be improving, leaving the path of least resistance lower.
I don’t expect a free-fall at this point. Few acres are actually in the ground, soybean prices are not providing any incentives to plant corn, and weather models continue to flip flop on when and how rains will return. While fields could dry out later this week, especially in the west, forecasts over the weekend suggested potential for regular storms to move across the Corn Belt.
When all is said and done, the crop likely will be planted more or less on time. Areas north and south of the winter storm track are dry, but much of the region is in good shape. As a result, producers likely will need patience before rallies emerge over the summer. While the long-term forecast out last week looks mostly favorable, areas in the western Corn Belt look like they’ve face enough heat to keep alive hopes for some type of rally. Fundamentals also look stronger into 2010 for corn that must be stored.

Corn, Wheat Give Up Gains

From Arlan at Farm Futures:

After a day of trying to trade fundaments, grain prices were once again looking over their shoulders to outside markets on Wednesday. What they saw wasn’t particularly helpful.

Traders continue to debate Tuesday’s acreage estimates. Further analysis of Farm Futures planting intentions survey data showed farmers who responded during the first week of March committing to planting corn, as USDA reported. However those who answered during the second week of March, when December futures failed to reach break-even levels, said they intended to plant much less corn. That suggests that final acreage intentions remain volatile, with weather and finances keeping some producers undecided until the last possible moment.

Nonetheless, today’s action could be signal prices are trying to following the typical seasonal pattern for a normal year, when December futures puts in a short-term top soon after the plantings report.

This is an interesting seasonal aspect to trading grains that I was previously unaware of.

Traders Liquidating Grains in Anticipation of USDA Report Tomorrow

Grains were weak again today across the board. Only wheat closed marginally higher; wheat was already at strong support that had held firmly for the past month at $5/bushel. I am writing this post so that I can refer to it in future years. This phenomenon of grains liquidating in anticipation of the USDA report is something that I can anticipate in future years.

Looking to Go Long Natural Gas

There are seasonal aspects to the price of natural gas. Right now, natural gas utility companies are buying natural gas for the winter usage of their customers. Prices typically reach their lows about now, so utility companies take advantage of the opportunity to buy and increase their storage of this valuable commodity. This year, the price of natural gas topped out at around $13.75 in early July. Last year, the price of natural gas bottomed below $7.50 in late August '07, moving higher in the fall. It then dipped again and bottomed a second time in early December '07. We're only about 60 cents above that price now. The chart shows a continued downtrend, but the momentum is waning (see chart). In fact, the Klinger Volume indicator (lower panel) suggests that heavy buying is occurring. I will be watching over the next several weeks to position myself for a long trade in natural gas.

The Seasonal Aspects of Gold

I strongly recommend a very fine article on the seasonal buying patterns of gold. I had wondered about these seasonal aspects for years, but this is the best article I've read on the subject.

There are very good reasons why gold prices surge higher during certain months of the year. Interestingly, we are just about to enter those months when gold prices tend to move higher with fairly consistent regularity. The most consistently profitable times to own gold are from mid-March to mid-May, late August to the end of September, from mid-October through Thanksgiving, and from early December to the first of February. That's a teaser.

Here's the article that explains the details, by Adam Hamilton:

Gold Bull Seasonals