Oil Prices Likely to Face Pressure Until Q4

Over the past two months, light sweet crude oil has made a significant recovery from its 52-week low of $39.72 on 2/18/2009. However, after a dramatic price appreciation of nearly 30%, how much longer can this rally be sustained?

In the past four weeks crude oil prices have been trading sideways and slightly down from the 2009 high of $54.34, and this trend will most likely continue through the first half of this year. Historically, oil prices have had a significantly higher likelihood of price appreciation in the fourth quarter of the year, beginning in October. This will most likely be the case in 2009 as well, as global demand isn’t expected to recover until the second half of 2009, at the very earliest. Historical monthly data from 1976-2008 was used in the analysis to produce the following charts which depict the cyclical trends of the oil market. These charts support the case that we'll see stronger momentum during the last three months of the year.

The most notable trend over the past 32 years has been the average price appreciation in the fourth quarter versus the rest of the year. Oil prices gained an average of 6.00% in the fourth quarter, compared to 0.14%, 1.18%, and 0.66% in Q1, Q2, and Q3, respectively.

click to enlarge

Although much less decisive data, the percentage of months that had positive price movement in the sample data is notably higher in the fourth quarter.

Historical Oil/Natural Gas Trends

Let me finish with some brief comments on the historical spread between oil and natural gas prices. The spot price of oil divided by the price of natural gas has had a historical mean of 12 since 1976, and a historical mean of 14.1 since 1930. This multiple has been on the decline as displayed in the below chart. The current multiple is 13.5, but the EIA is forecast (.pdf) of natural gas and oil prices would place the multiple at 5.5 in 2010.

Disclosures: None

Comments

[User 378002:]

All you have to do to debunk this trend that your trying to show is look back to the last quarter in 2008 in which oil took the biggest plunge in the history of the commodity... probably should have referenced that to at least look some what credible.

Apr 20 10:31 AM

[Daniel Miller:]

I would hope that most are aware of the plunge in oil prices in 4Q08, and the data in no way states that pries always rise in the fourth quarter.

I think most would agree that the cyclical nature of oil prices and the data presented above is very interesting. If you're expecting a broad rally in oil prices during 2009, and a global economic recovery in 2H09 or 1H10, the data supports more strength in prices during the last quarter of the year.

Apr 20 10:40 AM

[User 398320:]

as long as oil prices keep on dropping ,,more American Oil Independents will be going under and less incentive for the major oil companies to drill . The less oil in America the more dependent on foreign oil.We only thought we were dependent on foreign oil ....
RC

Apr 20 11:16 AM

[Ferdinand E...:]

An interesting article. I've just published a long article on oil, but I am not going to bother publishing an even longer survey. Until the macroeconomic and financial market trouble is cleaned up, I do not see a trend developing. The key factor in the oil market now is the intelligence of OPEC and Russia, but I see no point in elaborating on that contention.

Apr 20 11:44 AM

[Dustinian:]

39 dollars wasn't the 52 week low.

But I essentially agree with you.

Apr 20 02:35 PM

[doubleguns:]

All of your projected prices I assume are without taking any inflation into account. Have you looked at these prices with your inflation goggles on?

I am concerned that the dollar is not going to hold up well and prices are going to go a higher than this. I only wish my crystal ball was not fogged over so badly. Add the govt manipulation and I have no clue really at this point. Just a gut feeling that inflation is a concern.

Apr 20 10:20 PM

[dakkoune:]

historically speaking i agree with you but the 2008 surprise in oil prices will push us to think twice about the history prior to any decision or direction of crude oil prices .
in my opinion prices will remain floating between $ 40 and $ 55 for the rest of 2009 .
anyway your article is very usefull
thanks

Apr 21 02:40 AM

[dakkoune:]

I agree with your analysis from demand and supply side but the oil market pricing today has no sense and it is not based on fundamentals only.
We are living in a world where trading is more powerful than demand and supply therefore we should not forget the consumer sentiment and the financial crisis in our analysis

Apr 21 03:22 AM

[Freya:]

Seasonal analysis should be accompanied with seasonal criteria. The beginning of the driveing season and winter usage for instance.

Gasoline demand, heating oil demand both rise on a seasonal basis and both slow seasonally. Its the "weather" as retailers always blame.

One also has to factor refinery usage and seasonal maintenance of same onto the demand side. Shut down refineries, oil inventories rise, oil demand drops but distillate inventories also drop and prices rise for same which tends to boost oil prices even if large oil inventories are available. (Its a little loop, where the value of the distilled product increases the value of the source.)

Personally, I would exclude all years where natural disasters disrupted oil supplies.

Did you by any chance try to formulate your graphs using recessionary years only?

Apr 21 04:18 AM