Oil companies typically come into favor in mid-December and remain so until late April or early May in the following year, notes Jeffrey Hirsch, seasonal trading expert and editor of Stock Trader's Almanac.
This seasonal pattern can be seen in the yellow box in chart below. This trade has averaged 5.7%, 5.0%, and –0.5% over the last 15-, 10-, and 5-year periods.
Sizable declines in 2017 and this year are depressing average performance and seasonal strength in crude oil has been ending sooner, typically in late April or early May instead of late June or July over the past ten years.
This seasonality is not based upon the commodity itself (crude oil or natural gas); rather it is based upon NYSE ARCA Oil & Gas Index (XOI). This price-weighted index is composed of major companies that explore for and produce oil and gas.
Crude oil and XOI have been under pressure since January and natural gas has been stuck in a downward trend for years with only the occasional brief rally.
More recently, crude oil has been rallying since Pfizer announced the effectiveness of its vaccine on November 9 while natural gas had been rising since late July before weakening in November.
The global Covid-19 pandemic has cut demand while supplies remain more than sufficient. Global warming and a new administration that is more favorable towards alternative energy sources are two additional major hurdles that will remain even if wide-scale vaccinations curtail Covid-19.
Given current fundamentals, this year’s seasonal rally could also be below average, but pent-up demand could surprise and support an above average seasonal rally.
SPDR Energy (XLE) is the top pick to trade this seasonality. A new position in XLE could be established near current levels up to a buy limit of $39.70. Employ a stop loss of $32.03. Take profits at the auto sell of $46.16.
Chevron (CVX) is the top holding in XLE at 23.37%. The remaining top five holdings of XLE are Exxon Mobil (XOM), ConocoPhillips (COP), Schlumberger (SLB) and Phillips 66 (PSX).
