Peter Lynch had a fantastic run managing the Magellan Fund, using the basic concept that equity investors should only buy a stock if they understand the business and are confident of holding it through market turbulence. Futures markets can be as rewarding. Traders only need to respect what the brilliant money is doing.
But who are these brilliant players, and what are they currently telling us about crude oil prices?
Many market participants refer to managed money as smart money in the commodity markets. Some of the reasons why they have been designated this term:
- Have an enormous supply of capital
- Higher highly educated employees
- Many have access to market-moving data before it becomes public
- While others may have "friends" in Congress or the Senate
- And the list goes on
Most would think that managed money is smart money with all these advantages, and there is some talent in the managed money arena. However, real smart money (brilliant players) are commercial entities that work with physical commodities daily and are their livelihood. Commercial entities can be producers or processors of the commodity. Because of how closely they work with the physical commodity, they are in touch with the supply/demand of their product, storage factors, shipping logistics, labor cost, exports, extended weather patterns, and seasonal patterns. We will review the current outlook for crude oil prices that these commercials tell us later in the article.
Seasonal patterns for oil
Oil prices are incredibly cyclical due to the enormous demand for oil during the summer driving season and heating homes during the colder months. Because this demand comes at the same time each year, much like planting crops in the spring and harvesting them in the fall, these seasonal patterns can be highly reliable. Commercial traders are aware of these seasonal patterns; after all, their buying and selling of the commodity creates most of them.
Source: Moore Research Center, Inc. (MRCI)
MRCI researched crude oil prices for the past 15 years and found the above seasonal patterns (black line). When trading seasonal patterns, some optimal moves come during periods of the year that create a seasonal low or high and then have a significant move away from that level. Crude oil is no exception. The most dominant low, based on seasonality, typically occurs during the latter part of December and continues into early May.
Commercial entities know that each year in the US, Memorial Day weekend in May begins the summer driving season. After a winter of being confined indoors, consumers are ready for family vacations and getaways. To satisfy this need to travel, refiners must make enough gasoline to supply the demand for this summer driving season. To produce this gasoline, they must buy crude oil months before the driving season.
Source: MRCI
The daily chart for the RBOB gasoline futures contract represents its 15-year seasonal pattern (blue line) and an optimal buy-in period (yellow box). Notice how the gasoline and crude oil seasonal lows are almost identical.
As a crucial reminder, while seasonal patterns can provide valuable insights, they should not be the 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.
The prior reminder reiterates the need to confirm these seasonal patterns with another form of analysis. Technical or fundamental analysis may suffice, but how can we get legal insider information to increase the probability of success in this season's upcoming trade?
The Disaggregated Commitment of Traders (COT) report
Source: Barchart
Before exploring the COT report, let's review the recent price activity of the crude oil market. On the left side of the daily May crude oil chart is a rally off the bottom of a multi-month sell-off from the $78 per barrel level. The rally created the first signs of an uptrend with higher highs and lows. The market then traded sideways with several minor rallies and declines, but the price action did remain within the recent impulse move-up. Much of this sideways action occurred from October to late December.
Could this have been an accumulation pattern, and if so, how could we confirm who was accumulating?
Source: CME Group Exchange
With a dominant seasonal low in the crude oil and gasoline market near, it's a good time to examine what the brilliant players are doing. If the daily trend has turned up and MRCI research has found a dominant 15-year low in crude during December, what else could endorse this seasonal pattern for 2025?
The COT report is telling a terrific story. During seasonal lows, we should pay attention to the processors/users of a commodity activity. If a seasonal low is nearby and the processors/users are bullish, that is the trifecta trade. It's not perfect, but it's certainly more in your favor.
Currently, the processors/users are more bullish (blue line) than bearish (red line). During this sideways activity from October to December, they continued to hold and add to long positions. What stands out as significant is the number of long positions they had compared to last year when the seasonal low began, and prices (yellow line) rallied into May. In 2023, they held 508K longs; for this year's seasonal low, they have 625K contracts. That's an impressive 117K more longs this year than last.
Why would processors/users hold so many excessive longs if they didn't have a reason that we not in the energy field are unaware of? Because they are brilliant players!
They are not waffling over who won the election, the strength of the US Dollar, or any other adverse event that speculators would be discussing. The processors/users have built this long position for a reason. In their opinion, prices are heading higher again this year.
Markets to participate in this opportunity
Futures market traders could trade the standard-size (CL) crude oil contract, (QM) the mini-crude oil contract, or the micro-contract (CY). Equity traders may be interested in trading the exchange-traded fund (USO). Bullish oil prices, sometimes seen as an expanding economy, could positively impact the stock market and result in a bullish price move. Trading the mini S&P 500 (ES) or the micro-contract (ET) to participate.
In closing……
In the world of trading, understanding the dynamics of the markets can make the difference between success and missed opportunities. The seasonal patterns in crude oil and gasoline prices and the insights gleaned from the Commitment of Traders (COT) report provide a fascinating glimpse into how "brilliant players" operate. With their unmatched expertise and strategic positioning, these commercial entities offer valuable clues about market trends. As traders, leveraging these insights while layering them with technical and fundamental analysis can enhance your confidence and decision-making process. The question remains: Will you align yourself with these seasoned players or stay on the sidelines while the next big opportunity unfolds?
As we approach the seasonal low and witness bullish momentum building among processors and users, curiosity is key. What do these "brilliant players" see that we don't? What factors are driving their confidence in higher prices this year? By staying curious and diligent, traders can position themselves for potential gains while navigating the complexities of the market. The tools are available if you're drawn to futures contracts, ETFs, or equities tied to crude oil. The next step is to harness these experienced market movers' insights and shape your strategy for the months ahead.
