Seasonal Crude Oil Prices in Full Swing

Have you noticed the decline in prices at the pump recently?

The average price for regular grade gasoline in the U.S. has fallen 20 cents in the past month alone. During this same period, the price of crude oil has fallen from the 2013 peak of $110 per barrel, to $101 per barrel (a decline of nearly 9%). What has caused this weakness? To best answer this question we are forced to look at multiple factors.

While this recent decline may be welcome news for consumers, it is far from unusual for energy prices this time of year. Many commodity markets have “seasonality” that causes prices to often be pressured in certain directions during specific periods of the year.

Do these always hold true? We are the first to admit that there are no certainties in investing, but it does help to push the odds in our favor. During the Fall months, gasoline consumption deteriorates as Americans spend less time on the road for Summer fun and vacations. This time period also brings about mild weather that requires little use of heating oil, and a decrease in power consumption for heaters or air conditioning. This will typically lead to seasonal inventory builds, which bring about lower prices.

We must also look at a more macro level supply and demand picture for oil. There is currently no major shortage of oil in the world.

The United States continues to be the largest consumer of oil, but our thirst is no longer on the rise. U.S. oil demand peaked in 2005, and since then has declined 12% to the 2013 average of 18.7 million barrels per day. During this same period, the United States has drastically increased its own oil production levels. U.S. total oil production has risen from approximately 7.3 million barrels a day in 2009 to 9.7 million barrels per day in the first half of 2013.

That is a whopping 34% increase. While this is naturally factored into the price of oil, it has certainly helped keep prices from getting too overheated.

Another major factor contributing to oil weakness is the continued draining of risk premium from the market. During the past 6 months, turmoil in the middle-east ( Syria, Iran, Eqypt) has caused traders to continually drive up the price of oil in anticipation of a major supply disruption. Much of this risk premium has been an overreaction, especially when one factors in the limited relevance of these countries in the overall world energy export markets.

The mainstream media has loved using a possible closure of the Suez Canal as a way to create headlines that will attract readers. In all reality, this has virtually no chance of actually happening. The major powers of the world (and the regional OPEC countries) would take every action imaginable to prevent a disruption. As time has passed, trader’s nerves have been calmed by both the containment of these conflicts to their respective countries, and the continued flow of oil onto the export market.

Does this mean that oil prices are heading for a prolonged and steep fall?

In our opinion, no..

The factors discussed above have been weighing on the market, and will continue to do so in the short term. While we do anticipate continued weakness over the next 60-90 days, price stabilization should be on the horizon. The positive news for oil prices is that these are known elements, and they have not been able to cause a sharper move lower than what has occurred (even in the face of U.S. debt ceiling problems). This should soon make the crude market attractive from a put sellers perspective.

When colder weather begins to hit the northern states, demand for heating oil naturally increases as people heat their homes and businesses. As the winter progresses, refiners will have concluded much of their lower production periods and scheduled maintenance. In anticipation of the spring / summer driving season, they then begin to increase oil refining in order to build up inventories. These should combine to help push prices higher into the spring, or at least prevent the oil markets from making an extreme move lower.

Investors frequently wonder how they can capitalize off of the summer climb in gas prices, and maybe you have as well. The time to do so is during December and January while energy prices are often at their lows

The professionals trading these markets are smart people, and we do not pretend that this seasonality is not already a part of the crude oil and heating oil markets. What we are saying is that it does help to produce the price stability that we can use to our advantage.

By: James Cordier,