Tis The Season For Crude Oil

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Includes: BNO, DBO, DTO, DWT, OIL, OILD, OILK, OILU, OILX, OLEM, OLO, SCO, SZO, UCO, USAI, USL, USO, USOD, USOI, USOU, UWT, WTID, WTIU
by: Topdown Charts
Summary

Crude oil enjoys a rare set of bullish signals after a rough end to 2018.

As the title implies, we're heading into one of the strongest parts of the year based on historical seasonal patterns.

But the setup goes beyond seasonality as sentiment and supply form the basis of an emerging bull case.

Crude oil had a rough end to 2018 as a number of headwinds drove a swift correction. But so far 2019 has been much kinder to crude, and it could be just the start as headwinds have turned to tailwinds.

Today's chart comes from a report on the outlook for the Crude Oil Price (which also discussed the risks/opportunities in energy stocks).

The chart shows the average seasonal tendency of the WTI spot crude oil price across the year by business day. This is one of a few things we're watching.

crude oil price seasonality signal chart

Specifically the black line in the chart (the main focus) is built off the average price move by business day across the past 30+ years. Averages can deceive, but there is a notable pattern for crude oil prices to rise, particularly in the March-June period. This reflects seasonal patterns of real activity and actual seasonal effects (i.e. weather).

Seasonality is something that can be quite useful to add to an existing thesis, or as a prompt to investigate other variables to see if there is a broader case. I don't recommend trading on seasonality alone as seasonal effects can and do break down and there are exceptions. But as I hinted at there are a few other factors in favor of crude.

From a technical/sentiment standpoint we've seen a classic large spike in crude oil implied volatility; a reliable sign of a major bottom. We've also seen a decent washout in futures positioning after long oil had become a crowded trade. Other than that, on the supply side our short term forecast models point to a reduction in rig counts in the months ahead, and our view that the USD has peaked over the medium term also helps the case.

So with a set of tailwinds converging for crude oil prices, the fact that oil typically does well around this time of the year helps build conviction that the oil rally may only just be getting started.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.