Seasonality refers to the fluctuations in the value of an asset in relation to the time of year. Although predicting the effect of its impact isn’t an exact science, seasonality is a futures market phenomenon that traders and investors should take into account.
Energy is one asset class where the impact of seasonality merits extra attention. Whether you’re hedging risk by implementing weather trading strategies or a short-term crude oil speculator, understanding how the calendar can affect price is an integral part of achieving your trade-related objectives.
Seasonal Patterns in WTI Crude Oil, and Henry Hub Natural Gas
Many factors influence the value of energy, with futures market participants playing a big role in determining its market price. Regardless of the current global energy dynamic, it’s important to remember that futures traders are anticipatory in mindset. They’re not interested in what energy is worth today ― tomorrow’s value is what counts. This is where seasonality comes into play: when future supply and demand levels are projected in order to determine an efficient price today.
As a result, the four North American seasons have a significant influence on the futures markets. Below are the basic tendencies of the leading unrefined energy futures contracts:
- West Texas Intermediate (WTI) Crude Oil: The pricing of WTI futures is full of nuance. However, the general pattern is appreciation during the North American spring/summer and depreciation in the fall/winter. Conventional wisdom cites peak demand for refined fuels beginning Memorial Day and ending Labor Day. This typically produces a bump in WTI futures pricing as refiner needs increase, followed by a lull going into the winter months.
- Henry Hub Natural Gas: Natural gas futures exhibit unique seasonal tendencies. Prices typically peak in anticipation of cold-weather heating consumption, frequently during the fall and early winter months. Fall 2018 provided an extreme illustration of this circumstance, featuring an almost 60% rally in January 2019 Henry Hub natural gas futures.
While the prices of WTI and Henry Hub futures do not adhere to seasonality 100 percent of the time, the tendencies are very real. In fact, futures traders are known to engage derivative products designed for weather trading in order to manage anticipated environmental outliers.
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Refined Fuels: Gasoline and Heating Oil
If you’ve ever gassed up your SUV on the Fourth of July or adjusted your thermostat in mid-December, then you are familiar with astronomically high energy prices. The reason is simple ― seasonal supply and demand, right?
Unfortunately, it’s a little more complicated than the old supply and demand curve. Factors such as refiner output, geopolitical tensions, taxation and storage capacity also impact the price of gasoline and heating oil. However, the most obvious examples of seasonality in futures trading do involve the premier refined energy contracts RBOB gasoline and NY Harbor heating oil:
- RBOB Gasoline: Because gasoline is a product of crude oil, RBOB and WTI are consider to be tied at the hip. Again, the summer months typically yield higher pricing due to increased refined fuel consumption. However, holidays such as Thanksgiving and Christmas also serve to boost RBOB futures as travel demand grows, even during times of lagging WTI.
- NY Harbor Heating Oil: It makes sense that the price of heating oil futures would rise the same way natural gas does ahead of cold winter weather. However, this is not typically the case, with prices peaking in late winter/early spring (February, March, April) and lagging during late fall/early winter (October, November, December). This tendency is due to the seasonal patterns in crude oil pricing and decreased demand for heating oil in the spring, summer and early fall months.
Experts in weather trading monitor the futures pricing of refined products closely. While gasoline and heating oil are linked to global crude, the relationship is complex. Adverse or extreme weather patterns can drive both consumer demand and production, taking the impact of seasonality on the energy markets to a whole other level.
Is There Opportunity in Weather Trading?
Entire books have been written on the correlations between the futures markets and the weather. Ultimately, both are dynamic systems that maintain an evolving dialogue with one another. Understanding the relationship can be extremely challenging.
