Due to seasonality, large-scale changes are expected in energy markets this summer. Are you ready? | Don’t ignore this chart!

We’re moving deeper into the summer months, which typically means increased demand for energy products like crude oil and gas. Although demand tends to be seasonal, the entire crude oil complex is also sensitive to changes in the macroeconomic and geopolitical environment.

Simply put, every trader and investor understands that “going long” on energy commodities in anticipation of rising prices every June is not a viable strategy. Nonetheless, the seasonal context is worth looking at and comparing both the current price situation and the underlying forecast.

What are analysts saying?

Crude oil prices have been falling for three weeks in a row, but have continued to rise, reaching their highest level since April. Analysts expect summer fuel demand to reduce inventories and dampen the market, with oil reserves expected to fall by 850,000 barrels per day in the third quarter.

Oil markets are still expected to tighten heading into the summer, despite analysts predicting weaker energy demand due to mixed economic data from China and US consumer sentiment.

What does seasonality look like for the crude oil complex in relation to the S&P 500?

Summer slumps in the broader stock market may be seasonally consistent, but unpredictable. The same goes for increasing energy demand. Still, let’s take a look at the crude oil complex over the last 10 years using StockCharts’ seasonality chart..

memo: We are comparing seasonal performance to the S&P 500 because the S&P 500 is the benchmark against which we can adjust our portfolio.

WTI crude oil (proxy USO)

Chart 1. 10-year seasonality chart of USO versus S&P 500. Note the higher closing percentage (above the bar) and the average return (bottom of the bar).

Compared to the overall market over the past decade, July was USO’s second-worst performing month in terms of average returns (-5.5%) and its worst month in terms of higher closings (only 22%). The negative performance eased somewhat in August, with September delivering the best performance of the season with a 56% closing rate versus the S&P and an average return of 3.5%. So, if you’re considering buying crude oil, would August be a good month to add to your position?

Brent crude oil (substitute for BNO)

Brent crude oil (BNO) has a similar profile, but its September performance is higher than that of USO (which tracks WTI crude oil), with a higher closing ratio (78%) and a slightly higher average return of 3.9%.

Chart 2. 10-year seasonality chart of Brent crude oil versus S&P 500. September was BNO’s strongest month relative to the S&P.

RBOB Gasoline (using UGA as proxy)

Most investors don’t do much with gasoline futures, but it’s a product our wallets know very well (whether it’s the pain or relief of pumping gas). As you can see in the seasonality chart below, gasoline prices vary during the spring (see April) and summer (see September) due to changes in gasoline blend prices (refinery maintenance, crude oil prices, refining costs, etc.).

Chart 3. 10-year seasonality chart of RBOB gasoline versus S&P 500. Look at April, September, and December. You can see how this plays out in the daily chart later in the article.

In relation to the broader market, the U.S. Gasoline Fund (UGA) shows similarities to WTI and Brent. Negative performance in July and August led to improved performance in September, resulting in a higher closing rate of 78% and an average return of 3.4%. However, note that performance was strongest in April and December.

Natural gas (represented by UNG)

Natural gas was the group’s worst-performing asset and the only asset with a negative year-on-year return. However, it is worth noting that UNG is showing superior seasonal performance versus the S&P in August, which sets it apart from the other three assets.

Chart 4. 10-year seasonality chart of natural gas versus S&P 500. Natural gas surges in August. Will this rally materialize this summer?

Over the past 10 years, UNG has achieved a high closing rate of 89% and an average return of 7.8% relative to the S&P. What is the explanation for this? Increased demand for electricity, hurricane season and reduced summer storage are among the factors causing natural gas prices to surge in August.

Levels to Watch for USO, BNO, UGA, and UNG

use

Chart 5. USO daily chart. Prices are rising, but buying pressure is decreasing.

USO is trying to bounce back, but despite the sharp price rise, the momentum has shifted to selling pressure based on Chaikin Money Flow. reading. The Bulls’ goals are: USO hit 2023 and 2024 highs just above $83, a swing point above $81 that coincides with the 2022 resistance level not shown in the chart above. The bears are aiming to repress the price between $74 and $73, which is a huge support level. volume concentration (based on price and quantity) indicator reading) could go down to $70, which would mark the current swing low.

Overall, USO looks bearish in the near term, but if USO falls between $70 and $73, this range could be a favorable entry point for those looking to take advantage of a possible seasonal surge in September.

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Chart 6. BNO daily chart. Note the difference in momentum similar to USO.

Since Brent is correlated to WTI, BNO’s CMF numbers are not very different from USO’s. Both are in decline. However, the bold black dotted line highlights a long-term upward trend that can be tracked until 2022 (not shown in the chart above). The bearish goal is to see BNO’s price fall below support levels just below $30 and $29, but the rising trend line rising to around $28.50 would be a strong support level, especially for those looking to bet on the September season. no see. Price rise.

Uga

Chart 7. UGA daily chart. Keep an eye out for price spikes in April, September, and December.

Even bulls don’t want to pay higher prices at the pump, so assume everyone is a bear when it comes to RBOB gasoline. Nonetheless, April, September, and December are UGA’s busiest months, and the green rectangle highlights these price spikes.

In terms of momentum, CMF is deep into negative territory, indicating serious near-term weakness (relief in the pump?). But September is just around the corner. If you’re looking to take advantage of this season’s play, you can expect support around $62 (see trend line), but keep a close eye on resistance in the $68.5 and $73-$74 ranges. The all-time high reached in 2022 is $80.

UNG

Chart 8. Daily chart of UNG. Double top?

Natural gas UNG is showing a clear break above the downward trend line. Is it forming a double high (see blue arrow)? Declining buying momentum, as seen by the decline in CMF, supports the possibility of a near-term high.

UNG’s August seasonal surge was not as pronounced as it had been over the past decade due to increased production, warmer weather and higher inventory levels. However, if you want to position your portfolio for potential upside in the coming months, the low of $17 (or the 2024 low of $14) could be a favorable entry point.

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As we move into summer, energy demand generally increases, especially for crude oil and gas. Seasonal plays can be appealing, but they aren’t always reliable. That’s why it’s best to look at price action to find potential tactical entry points when taking advantage of seasonal opportunities. Additionally, it is important to consider the broader geopolitical and macroeconomic context. This is because these factors can significantly change the supply and demand situation for the product in question.

disclaimer: This blog is for educational purposes only and should not be construed as financial advice. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.