Seasonal Trading with Oil
09/13/2017 3:01 am EST
Seasonally speaking, crude oil 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, suggests seasonal trading expert Jeffrey Hirsch, editor of Stock Trader's Almanac.
The market can also 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 in the following chart.
Shorting the February crude oil futures contract in mid-September and holding until on or about December 10 has produced 22 winning trades in the last 34 years.
This gives the trade a 64.7% success rate and theoretical total gains of $101,920 per futures contract. Following three consecutive years of losses, this trade has been successful in four of the last five years.
It has been over three years since crude last traded above $100 per barrel. Ample supply and inventories have largely keep price under $50 per barrel ever since. Even hurricane Harvey had just a modest impact on crude’s price.
Gasoline did spike, but crude did not. Crude’s failure to respond suggests it next move could easily be lower especially as summer driving season demand begins to fade.
ProShares UltraShort Bloomberg Crude Oil (SCO) is the preferred vehicle to take advantage of seasonal weakness. SCO’s benchmark is the Bloomberg WTI Crude Oil Sub index which is comprised entirely of crude oil futures contracts.
SCO is designed to return 200% of the inverse of the daily move of this index and has nearly $200 million in assets. Its expense ratio of 0.95% is about average for a leveraged, inverse ETF.
Crude oil’s recent bounce has caused a corresponding drop in SCO. As a result, stochastic, relative strength and MACD Buy indicators are all negative.
SCO could be bought on dips below $36.50 with corresponding signs of improvement by technical indicators. SCO will be tracked in the Almanac Investor ETF Portfolio. If purchased, an initial stop loss at $32.95 is suggested.