Tis The Season For Crude Oil

Crude oil had a rough end to 2018 as a number of headwinds drove a swift correction. But so far 2019 has been much kinder to crude, and it could be just the start as headwinds have turned to tailwinds.

Today's chart comes from a report on the outlook for the Crude Oil Price (which also discussed the risks/opportunities in energy stocks).

The chart shows the average seasonal tendency of the WTI spot crude oil price across the year by business day. This is one of a few things we're watching.

(Click on image to enlarge)

Specifically, the black line in the chart (the main focus) is built off the average price move by business day across the past 30+ years. Averages can deceive, but there is a notable pattern for crude oil prices to rise, particularly in the March-June period. This reflects seasonal patterns of real activity and actual seasonal effects (i.e. weather).

Seasonality is something that can be quite useful to add to an existing thesis, or as a prompt to investigate other variables to see if there is a broader case. I don't recommend trading on seasonality alone as seasonal effects can and do break down and there are exceptions. But as I hinted at there are a few other factors in favor of crude.

From a technical/sentiment standpoint we've seen a classic large spike in crude oil implied volatility; a reliable sign of a major bottom. We've also seen a decent washout in futures positioning after long oil had become a crowded trade. Other than that, on the supply side, our short term forecast models point to a reduction in rig counts in the months ahead, and our view that the USD has peaked over the medium term also helps the case.

So with a set of tailwinds converging for crude oil prices, the fact that oil typically does well around this time of the year helps build conviction that the oil rally may only just be getting started.

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