One of the most attractive features of the commodity space is its cyclical returns. While it may make it difficult for long term investors, traders who know the patterns of certain hard assets can often turn a nice profit simply based on the natural price movements of different commodities. Crude oil is no exception to such patterns, as savvy investors have been profiting from the fossil fuel’s trends for years. Though crude has been exhibiting weakness with questions about its long-term future, its short-term seasonal trend may be a ripe opportunity for traders everywhere [for more crude oil news and analysis subscribe to our free newsletter].
Crude Oil Seasonal Patterns
As the U.S. enters the summer months, the world’s largest oil consumer will see peak demand for the energy source. This often translates into a pretty noticeable price trend for the commodity. According to the five-year seasonal trend, crude tends to make a top just before the month of May, when it will then experience a week or two of weakness. The commodity hits a major low around mid-May and then charges higher for the remainder of the summer.
A peak is typically reached a few days into August, when crude begins to pull back as demand does the same. Both five- and 10-year averages find early August to be a peak month, solidifying a decade-long trend for this hard asset. Below is a chart, courtesy of Signal Financial Group, displaying crude oil’s five-year seasonal trend.
As we move into mid-May it seems that a buying opportunity for crude is presenting itself. Those wishing to make a play on crude have a number of options to play the market. Below, we outline three ways for traders to utilize crude’s clear seasonal trend [see also The World’s 5 Largest Oil Consumers].
- Crude Oil Futures (CL): The NYMEX offers a suite of crude futures to help traders directly track the commodity. The August contract will likely be a trader’s best bet; it has a long enough maturity to capture the seasonal high and still holds a healthy amount of liquidity.
- 3x Long Crude ETN (UWTI): For anyone looking to add leverage to their position, UWTI is your fund. This ETN offers a 300% leverage on crude oil futures and maintains a reasonable liquidity. Be sure to use limit orders on the fund as the bid-ask spreads can get pretty large on 3X leveraged funds.
- Exxon Mobil (XOM): For those who prefer to take a more diversified approach, the world’s largest oil firm may be a good bet. Exxon also has a fair amount of profits tied to the natural gas sector, so it may offer a bit of relief if crude breaks its summer trend.
Disclosure: Long XOM.