ENERGY ANALYSIS: HEATING OIL SEASONAL TENDENCY
The seasonal tendency for oil prices to reach a significant bottom in the first half of March is well-established. Over the last few years, we have seen less of a decline in February than in years gone by, but the seasonal tendency for strength still seems to be in place. It has worked in all but the most exceptional circumstances. In 2003, we had the invasion of Iraq, so it did not work. That was the one time it would have yielded certain losses in a quarter of a century.
Heating oil futures have been trading for the longest period of any energy contract, so we consider this a heating oil seasonal tendency, even though it works even better in gasoline. We will take a look at trading strategies and tactics that have worked with this seasonal tendency.
The table below looks at the settlement prices for June heating oil over the last 28 years. Checkmarks indicate that the seasonal worked, equal signs that it broke roughly even and “x’s” that it failed. We just need prices to move higher after March 1st to score it a success. We have marked as uncertain close figures either way, even if profits were possible to obtain. In the three years with equal signs below, one could have broken even with no effort either way. And, at no time were there spectacular profits or losses during the even years.
June Heating Oil Futures - Settlement on day closest to day listed
Year 3/1 4/1 4/15 5/1 5/15 Result
2008 278.03 283.67 323.34 311.77 362.24 ü
2007 177.98 187.10 186.63 188.29 189.02 ü
2006 178.11 187.63 203.55 205.88 194.50 ü
2005 138.63 165.60 146.38 146.32 135.03 ü
2004 89.90 84.16 94.83 94.49 104.09 ü
2003 86.28 72.45 72.88 69.10 75.04 û
2002 59.10 68.94 63.84 67.42 67.79 ü
2001 69.89 67.01 79.23 76.47 76.63 ü
2000 71.57 65.85 62.93 67.44 77.25 ü
1999 33.05 43.40 43.08 44.47 42.95 ü
1998 42.92 43.83 44.28 45.78 41.64 ü
1997 52.99 53.95 53.89 54.33 56.48 ü
1996 53.42 57.08 62.62 54.16 54.81 ü
1995 46.44 47.47 48.79 51.09 49.86 ü
1994 45.55 45.80 47.40 47.57 47.81 ü
1993 55.79 56.25 55.83 55.88 54.08 =
1992 50.12 53.97 55.00 56.70 57.18 ü
1991 50.49 52.18 56.32 54.27 55.52 ü
1990 53.56 54.51 51.19 52.97 51.72 =
1989 46.94 50.62 52.25 49.46 49.87 ü
1988 41.33 44.84 48.44 45.95 47.98 ü
1987 43.33 48.92 47.44 48.15 51.89 ü
1986 38.33 35.33 37.66 40.56 43.62 ü
1985 68.40 74.50 73.90 71.89 70.32 ü
1984 77.20 77.31 78.01 78.63 81.37 ü
1983 70.24 75.81 77.60 78.33 76.68 ü
1982 75.34 77.69 86.98 89.32 92.90 ü
1981 96.95 95.10 96.50 91.49 92.46 û
1980 78.25 77.00 77.85 78.00 78.30 =
Overall Trading Strategy
The rule calls for the purchase of June heating oil in the first two weeks of March. At some point between then and mid-May there will be a profit. Some years it is better to sell in April than in mid-May, but many times, it makes sense to hold the long positions until May 15th. We have illustrated extended buying plans and extended selling plans, but it seems that they all even out. In effect, the trade calls for buying during March up to and including April 1st. Over the next 45 days, these long positions are sold.
We like to institute a “time-buying” plan where we divide up a certain number of lots over the trading days in the first half of March. If there are ten trading days and you need to buy ten lots, buy one a day - just like a multiple vitamin. If you have 50, buy one each hour. If you have two, buy one each week, and so on. Then, once they get into profit territory in April, we start unwinding them, using technical analysis of overbought pressures and resistance to help us adjust the timing and number of lots in each sale.
The biggest question with this trade is when to get out. There is not as hard and fast a rule for getting out as there is with getting in. And the system has never really worked with a stop-loss point, so we have no guidelines on avoiding disastrous losses other than the rules one might use in normal trading. You need to be able to take a long-term view of this trade, and if you are going to start it this year, you pretty much have to make a commitment to stay with it year after year.
In the 29 years listed above, this trade was a big loser in just two years, it broke even in three years (although there were opportunities to get out at a profit), and could have made money in the other 24 years. That is 6.90% wrong, 10.34% undecided, and 82.76% ‘right.’ We put quotes around “right” because you did need luck and timing in two of the last ten years to make it work. Still, it did yield profits for good and/or lucky traders in those years.
Most years offer steady gains that more than offset the break-even years or the worst possible loss in the two years that did not work – 1981 and 2003. But since there was no history of any tendency in the two-and-a-half year-old heating oil contract in 1981, there was no reason to have made that trade in the first place. That losing year was just a theoretical beam in this market’s eyes. In 2003, there was no reason to make this trade. The US was just about to invade Iraq and prices were high on war fears in February. It was the one year that we did not try to use it (since we started following this seasonal); the anticipation of war skewed the seasonal tendency, bringing early buying and a premature high on ‘victory relief selling.’
In many years, traders get this sudden urgent sense that winter is coming to an end after the first week of February through Valentine’s Day. In years when it is very cold beyond that, or when supplies are tight, prices will keep advancing through the end of February. In either case, prices still seem to end up being higher at the end of March than they were at the beginning. Every year it looks less likely to work, but still does. Recently, prices have seemed high to begin with, in the first two weeks of March. In other years, it had been so disappointing a winter that no one wanted heating oil at the end of February into early March. In 24 of the last 29 years, something happened to get prices higher by either April or May. In 22 of those years, or 76% of the time, prices were higher on April 1st than they had been on March 1st. In 26 years, 89.66% of the 29 years, prices were higher at some point in the first two weeks of May than they had been on March 1st. In thirty years of watching commodities, there is no more reliable seasonal tendency than that of oil markets to rally after early March. It works exceptionally well in heating oil and even better in gasoline futures.
It rarely seems wise, at the time, to buy in March, but something always seems to happen to push quotes higher by April or May or both.
Tactical Variations
We have a few different variations on the basic theme, and they tend to make the trade more disciplined for those who are unhappy with the rather vague procedure outlined above.
1. Short-Term Trade
This one calls for the purchase of the full long line on March 1st, and the sale of half of the position on April 1st and the other half on April 15th.
June Heating Oil Futures - Settlement on day closest to day listed.
Year 3/1 4/1 4/15 Avg Sale P/L Result
2008 278.03 283.67 323.34 303.50 +25.47 ü
2007 177.98 187.10 186.63 186.87 +8.89 ü
2006 178.11 187.63 203.55 195.59 +17.48 ü
2005 138.63 146.32 135.03 140.68 +2.05 ü
2004 89.90 84.16 94.83 89.49 -0.41 û
2003 86.28 72.45 72.88 72.67 -13.61 û
2002 59.10 68.94 63.84 66.39 +7.29 ü
2001 69.89 67.01 79.23 73.12 +3.23 ü
2000 71.57 65.85 62.93 64.39 -7.18 û
1999 33.05 43.40 43.08 43.24 +10.19 ü
1998 42.92 43.83 44.28 44.05 +1.13 ü
1997 52.99 53.95 53.89 53.92 +0.93 ü
1996 53.42 57.08 62.62 59.85 +6.43 ü
1995 46.44 47.47 48.79 48.13 +1.69 ü
1994 45.55 45.80 47.40 46.60 +1.05 ü
1993 55.79 56.25 55.83 56.04 +0.25 ü
1992 50.12 53.97 55.00 54.48 +4.36 ü
1991 50.49 52.18 56.32 54.25 +3.76 ü
1990 53.56 54.51 51.19 52.85 -0.71 û
1989 46.94 50.62 52.25 51.43 +4.49 ü
1988 41.33 44.84 48.44 46.64 +5.31 ü
1987 43.33 48.92 47.44 48.18 +4.85 ü
1986 38.33 35.33 37.66 36.49 -1.84 û
1985 68.40 74.50 73.90 74.20 +5.80 ü
1984 77.20 77.31 78.01 77.66 +0.46 ü
1983 70.24 75.81 77.60 76.70 +6.46 ü
1982 75.34 77.69 86.98 82.33 +6.99 ü
1981 96.95 95.10 96.50 95.80 -1.15 û
1980 78.25 77.00 77.85 77.42 -0.83 û
2008 was its best year, yet. In 22 out of 29 years, there was a profit in this trade; seven years returned a loss - assuming fills at the day’s settlement levels. Following this system to the letter would have resulted in net profits of 102.83 cents, or $43,188.60 per contract before commissions and fees. That is an average of 3.54 cents per year (over 29 years). The biggest losses were 13.61 cents in 2003 and 7.18 cents in 2000. The gain in 2006 was the second largest ever, and the largest gain before those in 2006 and 2008 was 10.19 cents in 1999. Prior to those years, the biggest loss was 1.84 cents in 1986 and the biggest gain was 6.99 cents in 1982. The violent trading years since 1999 have increased the volatility in this trade substantially. Volatility has only increased over the last two years, and with the threat of a recession the major threat to profits in this trade this year, we must argue for intelligent money management. Please consult experienced brokers or advisors before entering any trade in futures or options contracts.
We did not recommend making this trade in 2003, because prices had just started coming down from all-time highs of $1.31/gallon in heating oil. American forces were on the brink of removing Saddam Hussein from power. Prices had risen steeply going into the war, which started March 19, 2003.
2. Longer-Term Trade
This trade requires buying half the position on March 1st, the other half on April 1st, with the sale of everything on May 15th. It has worked in 21 out of 29 years, and has made a net profit of 121.81 cents per contract, or $51,160.20 profit before fees and commissions, per contract. It has gained an average of 4.20 cents per year. The biggest loss was 7.44 cents in 2005. The biggest winners were 12.80 cents in 1982, 17.06 cents in 2004, and the 30.92 cents gained last year (2008).
This trade worked in three of the years that the trade above did not - but did not work in four years where the first trade did. It has been a big winner over seven of the last 10 years. It would have worked well in 1998 if we had sold it out on May 1st rather than the 15th, but that’s getting away from rules that have been designed to inject some order into a disorderly process. The year by year breakdown for the trade is listed below.
June Heating Oil Futures - Settlement on day closest to day listed.
Year 3/1 4/1 Avg Buy 5/15 P/L Result
2008 278.03 283.67 280.85 311.77 +30.92 ü
2007 177.98 187.10 182.54 189.02 +6.48 ü
2006 178.11 187.63 182.87 194.50 +11.63 ü
2005 138.63 146.32 142,47 135.03 - 7.44 û
2004 89.90 84.16 87.03 104.09 +17.06 ü
2003 86.28 72.45 79.37 75.04 -4.33 û
2002 59.10 68.69 63.90 67.79 +3.89 ü
2001 69.89 67.01 68.45 76.63 +8.18 ü
2000 71.57 65.85 68.71 77.25 +8.54 ü
1999 33.05 43.40 38.23 44.47 +6.24 ü
1998 42.92 43.83 43.38 41.64 -1.74 û
1997 52.99 53.95 53.47 56.48 +3.01 ü
1996 53.42 57.08 55.25 54.16 -1.09 û
1995 46.44 47.47 46.95 51.09 +4.14 ü
1994 45.55 45.80 45.68 47.57 +1.89 ü
1993 55.79 56.25 56.02 55.88 -0.14 û
1992 50.12 53.97 52.04 56.70 +4.66 ü
1991 50.49 52.18 51.33 54.27 +2.94 ü
1990 53.56 54.51 54.04 52.97 -1.07 û
1989 46.94 50.62 48.78 49.46 +0.68 ü
1988 41.33 44.84 43.08 45.95 +2.87 ü
1987 43.33 48.92 46.13 48.15 +2.02 ü
1986 38.33 35.33 36.83 40.56 +3.73 ü
1985 68.40 74.50 71.45 71.89 +0.44 ü
1984 77.20 77.31 77.26 78.63 +1.37 ü
1983 70.24 75.81 73.03 78.33 +8.30 ü
1982 75.34 77.69 76.52 89.32 +12.80 ü
1981 96.95 95.10 96.03 91.49 -4.54 û
1980 78.25 77.00 77.63 78.00 +0.37 ü
3. Simple, Longest Term Trade
This calls for buying everything on March 1st, and selling it all on May 15th. This trade worked in 23 out of the last 29 years, and it had net gains of 196.93 cents, or $82,710.60 per contract, before any fees or commissions. Before the war-impacted price decline of 2003, the biggest loss was 5.46 cents in 1981, and the biggest gain was 13.98 cents in 1982. Prior to last year’s huge gain of 84.21 cents, the gain in 2006 was the largest, at 16.39 cents, with 2004 a close second, with a gain of 14.19 cents. The purely imaginary traders who made this trade, year in and year out, made 6.79 cents per year, on average.
June Heating Oil Futures - Settlement on day closest to day listed.
Year 3/1 5/15 P/L Result
2008 278.03 362.24 +84.21 ü
2007 177.98 189.02 +11.04 ü
2006 178.11 194.50 +16.39 ü
2005 138.63 135.03 - 3.60 û
2004 89.90 104.09 +14.19 ü
2003 86.28 75.04 -11.24 û
2002 59.10 67.79 +8.69 ü
2001 69.89 76.63 +6.74 ü
2000 71.57 77.25 +5.68 ü
1999 33.05 42.95 +9.90 ü
1998 42.92 41.64 -1.28 û
1997 52.99 56.48 +3.49 ü
1996 53.42 54.16 +0.74 ü
1995 46.44 51.09 +4.65 ü
1994 45.55 47.57 +2.02 ü
1993 55.79 55.88 +0.09 ü
1992 50.12 56.70 +6.58 ü
1991 50.49 54.27 +3.78 ü
1990 53.56 52.97 -0.59 û
1989 46.94 49.46 +2.52 ü
1988 41.33 45.95 +4.62 ü
1987 43.33 48.15 +4.82 ü
1986 38.33 40.56 +2.23 ü
1985 68.40 71.89 +3.49 ü
1984 77.20 78.63 +1.43 ü
1983 70.24 78.33 +8.07 ü
1982 75.34 89.32 +13.98 ü
1981 96.95 91.49 -5.46 û
1980 78.25 78.00 -0.25 û
Needless to say, your fills will be different. They could be better, but they could be worse. More than anything else, this report is designed to give you an idea of a seasonal tendency that we have seen at work for nearly three decades.
It is always difficult to tell where any given year is in terms of seasonality. Still, if one uses this tendency, one should make a commitment to use it every year, so that the averages can work to your advantage. Normal money management principles should be employed in case we hit a year that does not work. If it does not work this year, it would be a sign of uncommon weakness, given the strong history of success.
This report is for information only and does not represent any offer to buy or sell futures, options, ETF’s, cash market or OTC forward or derivative instruments or stocks, bonds or shares in any specific company. Cameron Hanover and its principals DO NOT take positions in energy futures, options, equities or shares or in any financial instruments that might be influenced or touched upon by our comments, research or analysis. This information is believed to be reliable, but we cannot guarantee that everything written is true or accurate. Futures, options, stocks, bonds, and all financial derivatives are fraught with perils and carry significant financial risk. Nothing written here should be construed as a recommendation to buy, sell, or trade any financial instrument. Past results are no guarantee of future possibilities or results. Consult an experienced commodities broker or licensed professional before entering into any transaction involving futures, options, ETF’s, cash market or over-the-counter forward transactions. Trading in any of these instruments can generate huge and financially crippling losses, which can exceed initial investments, margins or deposits.
All Rights Reserved, Cameron Hanover, Copyright 2009. Reproduction or transmission of this report without permission is prohibited.
GASOLINE SEASONAL TENDENCY
In regular gasoline, in all its various incarnations, the tendency for prices to advance from early March is even greater than it is in heating oil. Following the loose guideline of buying in the first two weeks of March and selling sometime before May 15th, the seasonal tendency has worked in 23 out of 24 years - or 95.83% of the time. We like that kind of historical track record.
The main reason for the increase seems to be related to seasonal maintenance turnarounds and the approach of driving season. Over the years, various specification changes seem to have helped. In 2003, prices rallied through March, and they then dropped into May. Still, it seems that buying in March has yielded profits consistently. The buying part is a great deal easier than the selling part, but profits are there to be realized if one uses money management techniques.
In 2003, we advised against following this seasonal – because prices advanced during the months building up to the Iraq invasion and, after that, they dropped when traders “sold the fact.”
June Unleaded Regular Gasoline - Settlement on day nearest day listed
Year 3/1 4/1 4/15 5/1 5/15 Result
2008 269.15 263.27 287.30 287.82 316.58 ü
2007 190.56 203.08 209.42 224.47 230.16 ü
2006 171.04 188.79 213.87 214.66 205.40 ü
2005 146.00 174.61 150.47 151.45 140.52 ü
2004 110.95 106.74 117.20 123.54 141.01 ü
2003 103.39 85.22 84.56 79.02 86.73 û
2002 71.26 84.37 78.33 80.48 78.82 ü
2001 85.19 87.98 100.70 105.84 100.36 ü
2000 88.10 81.55 78.95 83.27 96.79 ü
1999 40.03 52.89 52.16 55.19 52.00 ü
1998 52.15 52.11 52.74 54.29 50.75 ü
1997 61.63 62.31 61.47 62.63 64.38 ü
1996 57.66 64.59 69.12 67.42 67.20 ü
1995 55.89 57.60 60.76 64.15 64.90 ü
1994 46.83 47.62 50.78 50.47 51.17 ü
1993 60.36 61.22 60.95 61.81 59.12 ü
1992 60.15 63.13 60.61 64.69 63.68 ü
1991 61.67 63.71 70.21 70.83 69.08 ü
1990 62.52 64.95 59.55 61.03 63.51 ü
1989 53.59 65.00 68.21 72.61 66.09 ü
1988 45.27 49.00 52.15 49.37 52.73 ü
1987 49.02 54.04 51.55 52.15 55.48 ü
1986 39.90 37.80 43.30 50.40 53.35 ü
1985 73.50 80.70 81.10 79.85 80.00 ü
This report is for information only and does not represent any offer to buy or sell futures, options, ETF’s, cash market or OTC forward or derivative instruments or stocks, bonds or shares in any specific company. Cameron Hanover and its principals DO NOT take positions in energy futures, options, equities or shares or in any financial instruments that might be influenced or touched upon by our comments, research or analysis. This information is believed to be reliable, but we cannot guarantee that everything written is true or accurate. Futures, options, stocks, bonds, and all financial derivatives are fraught with perils and carry significant financial risk. Nothing written here should be construed as a recommendation to buy, sell, or trade any financial instrument. Past results are no guarantee of future possibilities or results. Consult an experienced commodities broker or licensed professional before entering into any transaction involving futures, options, ETF’s, cash market or over-the-counter forward transactions. Trading in any of these instruments can generate huge and financially crippling losses, which can exceed initial investments, margins or deposits.
All Rights Reserved, Cameron Hanover, Copyright 2009. Reproduction or transmission of this report without permission is prohibited.
Tactical Variations
One of the best variations is to buy on March 1st, and sell 50% on May 1st and 50% on May 15th. One can use any system that buys in early March and sells later. One can start selling at any time after April 1st. The table below shows the profit and loss figures for the March 1st to May 15th period, taking half profits on May 1st and half on May 15th. The last three years have been spectacular, with the three largest gains coming in those three years.
June Unleaded Regular Gasoline - Settlement on day nearest day listed
Year 3/1 5/1 5/15 Average P/L Result
2008 269.15 287.82 316.58 302.20 +33.05 ü
2007 190.56 224.47 230.16 227.31 +36.75 ü
2006 171.04 214.66 205.40 210.03 +38.99 ü
2005 146.00 151.45 140.52 145.98 -00.02 û
2004 110.95 123.54 141.01 132.27 +21.32 ü
2003 103.39 79.02 86.73 82.88 -20.51 û
2002 71.26 80.48 78.82 79.65 +8.39 ü
2001 85.19 105.84 100.36 103.10 +17.91 ü
2000 88.10 83.27 96.79 90.03 +1.93 ü
1999 40.03 55.19 52.00 53.60 +13.57 ü
1998 52.15 54.29 50.75 52.52 +0.37 ü
1997 61.63 62.63 64.38 63.51 +1.88 ü
1996 57.66 67.42 67.20 67.31 +9.65 ü
1995 55.89 64.15 64.90 64.52 +8.63 ü
1994 46.83 50.47 51.17 50.82 +3.99 ü
1993 60.36 61.81 59.12 60.46 +0.10 ü
1992 60.15 64.69 63.68 64.18 +4.13 ü
1991 61.67 70.83 69.08 69.95 +8.28 ü
1990 62.52 61.03 63.51 62.27 -0.25 û
1989 53.59 72.61 66.09 69.35 +15.76 ü
1988 45.27 49.37 52.73 51.05 +5.78 ü
1987 49.02 52.15 55.48 53.81 +4.79 ü
1986 39.90 50.40 53.35 51.87 +11.97 ü
1985 73.50 79.85 80.00 79.92 +6.42 ü
Using that system rigidly, there would have been profits in 21 out of 24 years for a net gain of $2.5339, or $1,064.24, per contract before commissions and fees, during the years we recommended it.
Five of the last six years have yielded profits of more than 20 cents a gallon. In 2005, it would have lost two-hundredths of a cent. We recommended NOT doing this in 2003, because prices had rallied strongly leading up to the March 19th invasion of Iraq.
Every year, our biggest fear is that too many people know about this trade for it to keep working, but this trade’s track record is second to none in commodities trading. Someday, it may stop working, but if it does, we would take a close look at the factors preventing it from its usual success.
Nothing written here should be construed as an offer to buy or sell anything, either as broker or principal.
Given this market’s volatility, we highly recommend discussing this trade with a qualified and experienced broker or advisor.
Trading in commodities, in any way, shape or form, can generate huge and debilitating financial losses in minutes or seconds.