Trading Crude Oil Seasonality

09/20/2013 6:00 am EST

Focus: COMMODITIES

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

Crude oil tends to make significant price gains in the summer, only to decline in the fall, writes Jeffrey Hirsch of The Stock Trader's Almanac, and this could signal trouble for oil bulls.

As featured in the Commodity Trader's Almanac 2013, in conjunction with our co-author John Person, crude oil (USO) price tends to make significant price gains in the summer, as vacationers and the annual trek of students returning to college in August creates increased demand for unleaded gasoline. The market also tends to price in a premium for supply disruptions due to threats of hurricanes in the Gulf of Mexico. However, towards mid-September, we often see a seasonal tendency for prices to peak out, as the driving and hurricane seasons begin to wind down. Crude oil's seasonal decline is highlighted in yellow.

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Shorting the February crude oil futures contract in mid-September and holding until on or about December 10 has produced 19 winning trades in the last 30 years. This gives the trade a 63.3% success rate and theoretical total gains of $68,410 per futures contract. Following three consecutive years of losses, this trade was successful last year as crude slid from near $100 a barrel to the mid $80s. Beyond normal seasonal forces, speculation that oil was going to be released from the strategic petroleum reserve played a part in last year's decline.

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This year an additional price premium was added due to the threat of US military intervention in Syria. However, a diplomatic path to remove chemical weapons from Syria now appears most likely and this premium is beginning to leave the market. And even if the diplomatic path fails, the international community has demonstrated the ability and willingness to act to prevent an oil price shock. In 2011, a total of 60 million barrels were released from reserves when war disrupted oil production in Libya.

By Jeffrey Hirsch, Editor-in-Chief, The Stock Trader's Almanac

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