- Seasonal analysis is a hybrid of technical and fundamental analysis, used as a guide to understand how markets tend to move over a set period of time.
- When a market is making a contra-seasonal move, it usually means there is a fundamental change in that market.
- In the energy sector, the seasonal leader during the winter quarter is RBOB gasoline.
Seasonality is an interesting area of market analysis, though widely misunderstood. The basic principle of seasonal analysis is it shows us what a market tends to do over a set period of time, usually 12 months, with its cycles tied to changes in supply and demand. This means seasonal analysis is a combination of both technical (trends) and fundamental (supply and demand) analysis. The misunderstood part is seasonality is a guide rather than an absolute. Therefore, we can use seasonality to tell us what a market tends to do rather than what it will do. Things get more interesting when a market moves counter to its normal seasonal pattern. The usual reason is a change in the market’s fundamentals from normal, a factor that can then influence the flow of investment money.
With that out of the way, let’s talk about the seasonality of the energy sector. As November turns to December, bringing with it the meteorological winter quarter, our initial seasonal assumption would be a rally in the sector led by heating oil (distillates, diesel fuel, etc.) and natural gas. A look at my seasonal studies for heating oil (HOZ23) shows the spot-month contract tends to post a low weekly close the second week of December before rallying 3% (10-year index) to 6% (5-year index) through the end of the year. From there, the spot-month contract gains an additional 13% (10-year) and 15% (5-year) from the first weekly close of January through the last weekly close of April.
Natural gas (NGF24) actually sells off during December, losing 29% (5-year) and 15% (10-year) from the last weekly close of November (last week) through the end of the year. Additionally, the spot-month contract tends to post a low weekly close the first week of February before rallying 39% (5-year) and 17% (10-year) through the last weekly close of August. If these moves seem counter-intuitive, and extreme, keep in mind we are talking about the famed Widow Maker, a market that doesn’t like to play by the rules to begin with.
But what about RBOB gasoline (RBZ23)? Given there isn’t as much driving done in the US after the Thanksgiving holiday, our Blink reaction might be RBOB tends to trend down through much of the winter until buyers start gearing up for the spring driving season. However, a look at the market’s seasonal study shows that not to be the case. In fact, we could make the argument RBOB is the leader of the energy sector during the winter. The spot-month contract tends to post a low weekly close the first week of December (technically this week) before rallying 7% (5-year) and 4% (10-year) through the end of the month.
Once we turn the calendar page to the new year, gasoline gets even more interesting. The spot-month contract tends to gain 30% (5-year) and 22% (10-year) from the first weekly close of January through the first weekly close of June. Having tracked this seasonal study for decades, the high weekly close has been pushed back from the first week of July, around the US July 4 holiday while the seasonal low weekly close has moved from mid-January.
As for 2023, we can see spot-month futures weekly closes have generally followed normal seasonal patterns, particularly the selloff from late July through the end of November. Last Friday saw the spot-month contract close at $2.1651, the lowest weekly close of the calendar year, with the first deferred January issue priced Wednesday morning near $2.1920. Keep in mind Friday’s close will be for the January contract as December goes off the board Thursday, November 30.
Fundamentally the market is not as bullish as it has been, though both the Jan-February and Feb-March futures spreads continue to show backwardation (inverse). This means short-term supply and demand remains seasonally bullish as supplies continues to tighten over the winter. It will be interesting to see what happens to deferred spreads as we make our way through the next quarter toward spring.
On the date of publication, Darin Newsom 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.
