By Dimitri Speck

Erroneous Expectations

The effect of the heating season on demand is however offset by other factors, such as the use of alternative energy sources and fixed prices agreements made in advance. The question is: what is the actual seasonal trend in crude oil?

Contrary to what one would expect, seasonally, the oil price  is set to decline between mid October and mid February. Below we show the actual seasonal trend of the spot price of the most important oil grade West Texas Intermediate (WTI) based on a seasonal chart.

A seasonal chart shows the average trend in prices in relation to the time of the year. The horizontal axis depicts the time of the year, the vertical axis shows the average price move of the past 30 years as a percentage. The seasonally weak period from mid October to mid February is highlighted on the chart:

1-crude-oil-30-year-seasonal

Contrary to what many market observers expect, crude oil prices typically decline during the heating season. In other words, sometimes, widespread expectations are not fulfilled – which is one more reason to always closely examine actual seasonality.

Crude Oil Declines between October and February are often Dramatic

The weak season highlighted in dark blue in the chart above lasts from October 12 to February 11 of the next year. The average decline in crude oil over this time span was 8.67 percent. In 17 out of 30 years crude oil fell, while it rose in 13 years.

On four occasions crude oil actually plummeted by more than 25 percent during this time period: by 43.07% in 1990, by 55.73% in 2008, by 43.08% in 2014 and by 44.38% in 2015.

The following bar chart shows the price movements of all years since 1986 in the time period October 12  – February 11.

2-crude-oil-detailed-statsCrude oil, return in percent between Oct. 12 and Feb. 11. since 1986. Crude oil often declines very strongly between October and February.

The red bars represent losses. The are dominant both in number and extent. This makes clear that it is not only a single outlier that has created the weakness in the seasonal chart.

Rather, quite strong price declines in crude oil have indeed frequently occurred in the time period from October to February. The price trend is seasonally weak right in the middle of the heating season!

Exploiting seasonal trends that deviate from general expectations can be highly profitable.