This is my weekly update that covers seasonal trends and the term structure of futures contracts. All of the below data and graphs come from my Commodity Seasonality website. The website is completely free, and I use Seeking Alpha as my sole outlet for weekly recap articles. I break down the updates by asset class, so let's get started.
Energy Futures Seasonality
April marks the end of the historically positive spring period for heating oil (NYSEARCA:UHN) futures.
Natural gas (NYSEARCA:UNG) is down nearly 10% year-to-date. The seasonal averages trend down over time because front month natural gas futures spend a large amount of time in contango.
The WTI crude oil (NYSEARCA:USO) futures curve is in backwardation. Backwardation is when contracts further out in time are priced lower than contracts closer to expiration. Backwardation benefits traders with long exposure, while contango detracts from returns. Most people are familiar with the concept of contango in VIX futures, where VIX futures further out in time are typically priced higher than the front-month contract. The same concept applies here.
This is important because most investors get commodity exposure through long-only commodity indices. Energy futures typically make up the majority of these indices. Contango is a headwind for long commodity exposure since there’s a "negative roll yield" over time. Since WTI futures are in backwardation, investors who are long commodities benefit from the monthly roll process.
April has had the highest average monthly performance in WTI crude over the past twenty years.
Financial Futures Seasonality
Bonds caught a bid last week. Seasonality turns positive in the US 30-year Treasury bond (NYSEARCA:TLT) in May.
12-month total return momentum in EUR/USD (NYSEARCA:FXE) is around +15%, meaning the euro has significantly appreciated against the USD over the last year. It’s interesting to note how poor future returns have been when 12-month momentum has historically been near current levels in EUR/USD.
JPY/USD (NYSEARCA:FXY) went against typical March weakness and rallied strongly last month.
April has historically been a significantly positive month for the S&P 500 (NYSEARCA:SPY). You can see the “sell in May and go away” anecdote in the below graph. Over the past twenty years the November 1 – April 30 period has been very kind to equity investors.
Grain Futures Seasonality
Oats quickly flipped from backwardation into contango.
April has historically been one of the stronger months of the year for rice futures.
Soybean oil has underperformed most other agricultural commodities in 2018.
Wheat (NYSEARCA:WEAT) futures have retraced a big portion of their recent rally. The front portion of the wheat futures curve is in contango and 12-month momentum is positive.
Metal Futures Seasonality
The strongest period of the year for copper (NYSEARCA:JJC) futures has historically been Q1, but that wasn’t the case this year. Copper fell ~10%.
Positive seasonality for gold (NYSEARCA:BAR) tends to kick in around August.
Backwardation in palladium (NYSEARCA:PALL) futures has decreased. It’s the only precious metal in backwardation.
Platinum (NYSEARCA:PLTM) futures have closely tracked their 5-year seasonal average so far this year.
May and June have historically been a weak period for silver (NYSEARCA:SLV) futures.
Soft Commodities Seasonality
12-month momentum in cocoa (NYSEARCA:NIB) futures is solidly positive as the soft commodity has been one of the best performing commodities in 2018.
Coffee (NYSEARCA:JO) seasonality continues to be negative into June. Like some agricultural commodities and natural gas, the front portion of the coffee futures curve tends to be in contango.
April and May have had lower than average monthly performance over the past two decades in lumber futures.
Sugar (NYSEARCA:SGG) seasonality turns positive in June.
Commodity Seasonality Conclusion
That wraps up coverage of individual contracts. I'll close with my most important charts.
First, let's look at the 20-year average monthly performance numbers for the month of April. The best-performing contracts have historically been soybeans (NYSEARCA:SOYB), the S&P 500, and copper. The worst performers have been orange juice, oats, and sugar.
Here's a snapshot of the current amount of contango or backwardation for each contract I track. I compare the contract with the highest open interest to the contract with the third-highest open interest. Cotton (NYSEARCA:BAL), lumber, and soybeans are in the highest amount of backwardation. Natural gas, wheat, and corn (NYSEARCA:CORN) are in the highest amount of contango.
Below are the 12-month roll-adjusted momentum numbers for each contract. Lumber, palladium, and WTI crude oil have been the top performers over the past twelve months. Sugar, orange juice, and coffee have been three of the weaker commodities.
I hope you've found this article to be useful. It's meant to cut down on your research time and save you some money. Be sure to follow me for my seasonality updates on Seeking Alpha. Let me know if you have any questions in the comments below.
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