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Is The Big Energy Trade of 2023 just beginning?

Carl Capolingua Carl Capolingua 13/03/2023
Is The Big Energy Trade of 2023 just beginning? Is The Big Energy Trade of 2023 just beginning?
Is The Big Energy Trade of 2023 just beginning? Carl Capolingua


  • What are seasonal patterns?
  • What causes seasonal patterns in energy markets?
  • Seasonality in the West Texas Intermediate Crude Oil market
  • Seasonality in the US Natural Gas market

Seasonal analysis is the study of repeating patterns within historical prices of financial assets.

Patterns in price movements of agricultural commodities are possibly the most commonly observed seasonal patterns, because certain events such as planting and harvesting can trigger market participants to buy or sell accordingly. It might surprise you, but stocks have also been observed to move in seasonal patterns, often relating to the timing of company earnings reporting, dividends, and around regular political events such as presidential elections and federal budgets. 

Today, we'll discuss seasonal patterns in the energy markets, in particular the markets for West Texas Intermediate (WTI) Crude Oil and US Natural Gas. These markets are most influenced by, wait for it, the weather! Think about it, it's actually not so crazy this should be the case...

Afterall, what do use these commodities for? We'll discuss the importance of a few of their uses soon, but by far and away their most important use is in electricity generation. Whilst there are many uses here, for example, powering business and industry, powering our cars (both in terms of traditional combustion engines, but also electric vehicles), and charging our phones so we can watch Tik Toks, the most important use for energy commodities is generally keeping us warm. 

There are certain times of the year where the majority of energy generation is devoted to keeping us warm. Further, during these times we may also burn natural gas or refined crude oil derivatives like kerosine directly within our homes. 

Other times of the year, keeping cool is just as important. Together, the desire to keep warm or keep cool ensures buying and selling activity in energy commodity markets is centred around the stocking and de-stocking of stockpiles used in energy generation during hotter and colder times of the year. The key periods in this regard are the Northern Hemisphere summer between June and August and winter between December and February.

There's also another seasonally important period of the year which has nothing to do with keeping warm or cool, and it's one which primarily impacts the consumption of crude oil. In summertime in the USA, millions of Americans take to the road for their annual family driving holidays. This period is commonly referred to as "Summer Driving Season", and we often see an increase in the stockpiling of crude oil in anticipation of this event.


Seasonality in the West Texas Intermediate Crude Oil market

West Texas Crude Oil seasonality chart

The data in the chart above is taken over approximately the last 30-years (since August 1990 to be precise!). I've chosen to use median monthly performance instead of average monthly performance because after I reviewed the data for WTI it became very clear there was a substantial amount volatility in its monthly returns, as well as many large outliers. For example, during the early stages of the global COVID-19 pandemic in 2020, WTI lost 54% of its value in March 2020 and then gained 88% back in May.

As a result, the difference in WTI's average and median monthly performance for March and May over the 30-plus-year sample are substantially different. WTI's March average performance is +1.77% whereas its median performance is +3.07%. If WTI's March 2020 performance is replaced with its average prior to 2020, overall March average performance rises to +3.59%. If WTI's huge drop in May 2020 is accounted for in the same way, its overall average performance drops from +3.63% to just +1.04%.

Clearly, months like March and May 2020 have an oversized impact on WTI's average performance, and without them, WTI's average performance is very similar to its median performance (i.e., I concluded median performance is most likely to be the better measure of central tendency!).

Looking at WTI's monthly median performances, it is clear it experiences its main period of strength between the months of February and April, but to be fair, really any time between December and September appears to be solid for the bulls. With respect to the February and April outperformance, this is likely due to the restocking of inventories post the Northern Hemisphere winter draw down, and in preparation (particularly during April) for the US Summer Driving Season. Don't forget, it takes time to refine WTI into the gasoline required for all those trips to Wally World!

The bears take over in October and November. Most likely, this is a hangover in demand until restocking begins in earnest for Northern Hemisphere winter in December.

As the headline suggests, this article is focussed on the immediate opportunity facing traders, that is, the prospect of a seasonal rally in WTI which is supposed to be occurring right now, and which should persist through the strongest performing months of March and April.

Note, in addition to March and April being the strongest months in terms of gains for WTI, they are also very reliable in terms of delivering that gain. March delivered a gain five times out of eight occurrences during the sample period, whereas April was even more reliable with nearly two-thirds of occurrences delivering a gain. 

crude oil technical analysis crude oil chart WTI chart

So, here we are. Depending on when you read this some time around mid-March, we should all be going long WTI, right? 

Possibly! But remember! Seasonal patterns are a reflection of history. The future is yet to be written (at least that's what Doc told Marty in Back to the Future!). What I am trying to say here is, there's no guarantee seasonal patterns are going to repeat today, next week, or next year. Anything can happen to throw a spanner in the "what usually happens" works.

Take for example, war. Wars in locations sensitive to energy production can have a massive impact on the price for energy commodities, and sometimes, may result in major negative impacts to the global economy. The First Gulf War in 1990 sent oil prices rocketing from around US$16 per barrel to around US$44 per barrel in just a few months. 

In late February 2022, Russia invaded Ukraine. Up to that point, Russia was one of the worlds biggest suppliers of both crude oil and natural gas, particularly to Europe. This sent prices of energy commodities spiralling higher, as can clearly be seen on the above chart, and the chart below of US Natural Gas.

Much of the (negative) movement in energy commodity prices since then can be explained by concerted destocking after the initial supply-side shock. As a result, WTI finds itself currently at odds with some aspects of its typical seasonality. Certainly, November saw a decline, but December was a flat month – not up, and January and February showed modest declines instead of their typical gains. 

The long-term trend ribbon (dark pink) is skewed to the downside, but I would hardly say a powerful long-term downtrend is in place. Really, if anything, looking at other technical factors, momentum to the downside has all but dissipated.

Since December 2022, the price action contracted with generally lower peaks and higher troughs in a broad and narrowing trading range between $70.08 and $83.34. This temporary equilibrium was disturbed by another dislocation to the downside as fears global economic growth would take a substantial hit as a result of the recent banking crisis.

So, once gain the short-term trend ribbon (light pink) is skewed to the downside, and is realigning with the long term trend. This ribbon will likely offer dynamic supply around the $72.50 - $74.00 area. Note, the likelihood of meaningful supply in this area is exacerbated by the static supply points of $74.46 and $72.25 from 5 January and 6 February lows respectively.

The candles show the recent bouts of supply has stabilised with numerous lower shadows probing the December 2021 low of $66.12. Lower shadows indicate an excess of demand at a particular level. The white candles from 20-22 March are encouraging at least a short-term low is in.

$64.36 is clearly then a key demand point. If the price of WTI closes below this level, then the trends are going to reassert and push the price lower again. I expect substantial demand around the 2 December 2021 low of $62.43 and the 23 August 2021 low of $61.74. Beneath these key support levels, price declines may become precipitous.

We are pushing deep into the period where we are supposed to be observing seasonal strength for WTI. The further we progress without a rally to at least above the ST trend ribbon, the less likely any season pattern is going to play out in the first half of this year. Still, with modest strength still anticipated through the summer months, and with key technical support levels holding so far, traders should remain attentive to signs a seasonal move may be finally beginning.


Seasonality in the US Natural Gas market

US Natural Gas seasonality chart

The US Natural Gas seasonality chart shows a far greater range of peaks and troughs through a typical year. This makes sense when you consider natural gas is more closely associated with electricity production, and electricity production itself is highly seasonal. We want to keep warm in winter and cool in summer, and each requires a great deal of energy.

August to September is all about building stocks ahead of Northern Hemisphere winter. It appears utility companies are in the habit of overstocking, and therefore the demand for US Natural Gas is far more subdued during the actual winter months. As a result, the price of US Natural Gas tends to decline from November through to February.

Restocking occurs during March through to May as utility companies begin to prepare for the Northern Hemisphere summer, and the price US Natural Gas generally rises again. Just like during winter, the summer months of June and July are typical drawdown months for stockpiles, and therefore the price of US Natural Gas tends to pull back.

The indications from the US Natural Gas seasonality chart suggests traders should be looking to buy some time in February around the nadir of the November to February downturn, and then to sell some time in May after the run up from March. The next buying opportunity from there likely occurs some time in July with traders best moving out of those long positions around October.

Another stat which should give traders greater confidence in at least breaking even on a long trade in US Natural Gas during the present period of seasonal strength, is the reliability of a gain in the months of March and April. Each delivered a gain for US Natural Gas on nearly two-thirds of occurrences during the sample period.

natural gas  price technical analysis natural gas price chart

Looking at the price chart of US Natural Gas, we can see clearly the wipe out to the downside normally associated with the November to January period. During this period, the price of US Natural Gas dropped precipitously from around US$7.60 mmBTU to US$1.96 mmBTU (FYI, mmBTU = million metric British thermal units).

The modest bounce since the 22 February low is similarly consistent with the seasonal chart, which suggests a major swing low is usually set in either February or March. The big question is what happens from here, and whether the March through April rally is a higher or lower probability this year?

There's not a great deal in the current technicals to suggest investors should expect a 'big one' this year, at least not yet. The long term trend (dark pink ribbon) is firmly entrenched to the downside, and the short term trend (light pink) ribbon appears to be following through on its tendency to impede short term price appreciation. 

I am encouraged by the string of white candles / lower shadows, or as I call them "demand-side candles" from the 22 February low of US$1.96 mmBTU to the 3 March high of US$3.03 mmBTU. The big black candle on 6 March is a concern, however, and candles and price action since then have been feeble to say the least. 

What would generate my interest in trading the potential seasonal strength in US Natural Gas from March to April?

Well, a big demand-side candle occurring above the 22 February low of US$1.96 mmBTU. Such a candle would remove the last, sticky elements of supply from the November decline, and cement newly incoming demand has taken control of the US Natural Gas price. 

Only the most aggressive traders would brave an entry solely on one demand-side candle – and even then they'd be well advised to only add a portion of their intended position (I always suggest one-third to start off). A confirming candle of the initial demand-side pulse would be sufficient to potentially add another one-third of the intended final risk, and then the final third might be added on the next close back above the 3 March supply point of US$3.03 mmBTU.

From there, potential targets are to the 24 October 2022 major swing low of US$4.75 mmBTU, which as a point of previous demand should now act as a future point of supply. It commences what should be a significant zone of supply which reaches all the way back up to the 23 November 2022 high of US$7.60 mmBTU.

Until the key demand signals I've discussed above are observed in US Natural Gas, I suggest there's little to do. Given the seasonal trends it's probably not worth looking for shorts for a while, and given short-and-long-term price trends remain skewed to the downside it's hardly worth looking for longs either. 
Trade WTI Crude Oil with our WTI CFD contract, and trade US Natural Gas with our NGAS CFD contract.

Go long and short WTI and US Natural Gas with ease and potentially capitalize on seasonal patterns in these markets. Contact us today for more information, or open a trading account.

exploring trades in the energy sector

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