Gasoline prices typically fall in the autumn and early winter as demand decreases and gasoline retailers switch to cheaper winter-blend fuels. Additionally, Americans take fewer trips during this period, further reducing demand. OPEC is expected to increase production in December, which could contribute to further price declines. These combined factors signal a potential for lower gas prices in the coming months.
What happens next to crude oil?
As gasoline demand wanes and temperatures cool in the Fall, oil traders should note the fuel market shift as gasoline retailers switch to winter-blend gasoline starting September 15. Winter-blend fuels are cheaper due to fewer environmental restrictions from the Environmental Protection Agency (EPA). Still, the transition can temporarily drive prices higher as refineries and gasoline retailers adjust inventories. This brief price bump can present short-term trading opportunities for oil traders, particularly if weather events, like hurricanes in the Gulf of Mexico, disrupt production and supply chains, adding further volatility to gas prices during the late summer and early fall.
Unlike the mandatory Spring switch to summer-blend fuels, the Fall transition to winter blends is optional, yet many gasoline retailers opt for it to stay competitive in pricing. Traders should be aware that some gasoline retailers delay the switch until they have depleted their Summer-blend stocks. By the end of September into early October, oil traders can expect prices to decrease as demand subsides and more retailers shift to the cheaper winter blend.
The Commitment of Traders (COT) report
We will examine two COT reports and describe what each shows about the oil market.
The first one is the original COT, the Legacy Report from the 1960s.
Source: Barchart.com
Technically, the price action looks bearish and has been trending lower on the daily chart. Like many market moves, oil appears to have moved to lower prices rather quickly. When markets get slightly overextended in either direction, they tend to need a price correction in the opposite direction. In this case, a price rally is required to find more higher-priced sellers to begin the next move down.
The Legacy COT Report for the commercial traders (red line) shows them in a net short position, with more short positions than long. However, the red line is the least negative than at any time in the past 12 months, reflecting that this category of crude oil traders has been hedging price risk by buying into the recent price sell-off. Unfortunately, the Legacy Report merges commercial and swap dealers into the same category, reducing the accuracy of commercial traders' positions.
The following report we will examine is the Disaggregated COT Report. What separates this report from the Legacy Report is that the producer/processors (commercial traders) have their category, and the swap dealers have their own. Another benefit of this report is that traders can explore not only the net position of traders, the number of long contracts minus the short contracts, but also the gross positions of the commercial traders.
Source: CMEGroup Exchange
The added detail to the disaggregated report reveals that the producer/processor traders are net long, in more long positions than short, crude oil. The blue bars represent the number of long positions, and the red bars represent the number of short positions. The yellow line on the graph is the recent price action of crude oil. Overlaying the price action illustrates the recent times in the past 12 months when producer/processor traders held this many long positions, and prices rallied.
The table under the graph highlights that the producer/processor category currently holds 63,399 more longs than last year.
Seasonal Pattern
Source: Moore Research Center, Inc. (MRCI)
MRCI research (black line) has found that during the previous 15 years, crude oil has reached a low near the end of August or early September, only to rally into early October before continuing its seasonal price downtrend into year-end.
The recurring fundamentals discussed early in the article include less restrictive EPA regulations for winter blend gasoline, less consumer demand for gas as vacation season ended, airlines experiencing a lull in filling seats from mid-September to early November, and oil for refining heating oil has been purchased. Seasonal patterns reflect these recurring fundamental events, and MRCI research clearly shows a market's historical seasonal highs and lows.
It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
In closing….
Oil traders should remain mindful of seasonal and technical factors as the market transitions into Fall and Winter. The shift to cheaper Winter-blend gasoline, combined with decreased demand for fuel, typically leads to lower energy prices. However, short-term price spikes may still occur due to potential weather-related disruptions. OPEC's expected increase in production in December could add downward pressure on prices, reinforcing the seasonal trend of lower fuel costs.
The Commitment of Traders (COT) reports provide valuable insights into market sentiment and positioning. The Legacy COT Report indicates commercial traders have been hedging risk amidst recent oil price declines. At the same time, the Disaggregated COT Report shows producers/processors are holding significant long positions, suggesting a potential for a price rally before further declines. Although seasonal patterns, such as the typical price rally in early October, can offer guidance, traders should integrate these insights with other market indicators and risk management techniques to navigate the volatility and capitalize on trading opportunities effectively.
Futures market traders could trade the full-size (CL) crude oil contract, (QM) the mini-crude oil contract, or the micro-contract (CYZ). Equity traders may be interested in trading the exchange-traded fund (USO). Bullish oil prices.could encourage the stock market to continue rallying, trading the mini S&P 500 (ES) or the micro-contract (ET)to participate.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
