Seasonality is a concept well understood by the capital markets. Take adages such as “Sell in May and go away,” which reputedly has its origin in the North American mining industry, where mines closed down in May for refurbishment and retooling because there would be no orders from Europe or other world markets over the long summer months. Other examples abound. For investors, seasonality is the tell-tale of when to trade and when not to trade or, alternatively, how to position a portfolio for recurring and anticipated future market events.
Seasonality in the crude oil market simply reflects physical supply and demand, and the alteration between these two dynamics as external forces change. For example, everybody knows that summer driving season in the U.S. starts with the Memorial Day long week-end in May and lasts until Labor Day in September. Historically, this period is supportive of higher crude oil prices—in effect, peak demand—while the balance of the year normally shows softer demand with correspondingly lower prices. So how has the market assessed this current year’s seasonality prospects: positively or negatively?
1) Speculative futures market activity;
2) Demand for gasoline, particular in the U.S.;
3) The supply dynamic.
If you look at the composition of the futures market for WTI, speculative positions still have a commanding presence, but are well off their peak from earlier this winter. At approximately 50,000 contracts, total spec crude oil contracts are less than one-half of where they were at the top in February; they are currently at roughly the same level as they were in 2013. Obviously, if you round up the obvious suspects, the hedge funds and fast money crowd have clearly been lightening up on WTI contracts, though part of this could have been positioning for quarter (and first-half) end at the end of June. Still, if seasonal forces were that compelling, you would expect more activity rather than what we have seen to date.
So far as gasoline demand is concerned, motor gasoline demand in the U.S. has actually decreased this year over 2016. For the comparable period of the third week in June for each year, demand was down almost 2 percent (9.538 million barrels per day versus 9.709 million bpd in 2016) according to the EIA’s most recent This Week in Petroleum. Again, this flies in the face of earlier predictions for increases in U.S. demand over the peak summer driving season. So far, it hasn’t happened.
Finally, on the supply side, as has been widely reported by Reuters and other news agencies, U.S. crude oil inventories remain more than 100 million barrels above their 5-year average level, while OPEC output rose by 260,000 barrels per day in June to total 32.55 million barrels. Half of this increment came from Libya and Nigeria, the unfettered producers from the May OPEC meeting, which also makes a mockery of the so-called significant production cuts. Even the Saudis increased production by 90,000 barrels per day.
Putting it all together—decreasing hedge fund interest, flat to declining end-user demand and historically high levels of supply—what is to be made of this except the obvious? “The bulls have had a nice little run, but I would not be surprised if the bearish fundamentals take hold,” Stephen Schork, president of Schork Group said on Tuesday. “We are beyond the peak refinery demand season for oil.”
Like so many other things, seasonality works except when it doesn’t. But if anybody is counting on seasonality this year to give the crude price a boost, they may be out of luck.
By Brian Noble for Oilprice.com
