If there is one constant in this world, it's change. And no other commodity is in such high demand that change significantly impacts its price. This change can come in many forms and occur quickly. Three factors currently and soon will affect oil prices: winter demand, driving season demand, and geopolitical factors.
Winter Demand
In many parts of the world, there is an increased demand for heating oil during winter (December to February), resulting in higher oil prices as demand for heating fuels increases. In the winter of 2022–23, about 4.96 million households in the United States (US) used heating oil as the primary space-heating fuel, and about 82% of those households were in the US Northeast region.
Source: US Energy Information Administration (EIA)
In a recent report, the EIA announced:
- "In our base case, we forecast that the 4% of US households that heat primarily with heating oil will spend an average of $1,851 this winter, up 8% from last winter."
- "In our base case, we forecast that households that heat primarily with heating oil, which are located primarily in the Northeast, will consume 40 more gallons of heating oil per household this winter than last winter."
- "We expect higher consumption because we forecast a somewhat colder winter this year than last year."
Driving Season Demand
In the United States, the summer months, beginning in May, typically see increased demand for gasoline as people take vacations and drive more. While the gasoline demand appears in May, refiners must begin purchasing crude oil in January to allow time to refine and deliver the gasoline.
Source: EIA
The above graph illustrates how the gasoline demand rises in January to a peak in August. This consumer demand for gasoline each year creates a seasonal buying pattern in crude oil beginning in January and usually ending around May 01. We'll discuss this in more detail later in the article.
Geopolitical Events
On October 07, Israel was attacked by the Hammas terrorists, leading to retaliation from Israel. Crude oil rallied about 12% before resuming its downtrend due to anticipated deteriorating economic conditions. Recently, attacks from the Houthi, an Iranian-sponsored terrorist group, have been wreaking havoc on freighters using the Red Sea and Suez Canal region. Using drones, boarding ships, and firing missiles, the Houthis have caused the majority of freighters using this region to reroute around the southern tip of Africa, adding days and weeks to their delivery time. This results in a supply chain issue, including crude oil deliveries. Oil has rallied about 11% since the attacks' frequencies have escalated.
The confrontation between Israel and Hamas is most likely going to be an extended event. There will be more problems transporting supplies in the region, including crude oil.
This week, Malaysia, a Muslim country, announced they banned Israeli-flagged ships from loading or unloading at their ports in response to the Gaza conflict.
Geopolitical risks like these appear to be long-lasting at the moment. Adding to the price escalation of crude oil as the supply chain issue decreases international supply.
Commitment of Traders (COT) Report
Source: Barchart
The 12-month daily chart of crude oil and the COT report (red line) illustrates that the oil refiners have steadily bought crude oil futures contracts each week since the horrific attack on Israel in October. The three events of the perfect storm we've been discussing have not gone unnoticed by the commercial traders. They are near their least bearish point than any time in the past year.
In the next section, we will discuss a dominant seasonal buying pattern that crude oil has and that commercial traders are well aware of. The increase in commercial long positions before a significant seasonal buying pattern is usually supportive.
Seasonal Pattern
Source: Moore Research Center, Inc. (MRCI)
MRCI research reveals that historically, the May crude oil futures contract has risen from January to the expiration of the contract in May. Currently, traders could use the February contract for better liquidity. But, the bullish window is open from January to May. The two lines represent the 15-year (black line) and the 30-year (purple line).
Going into January, the perfect storm we've discussed could support this year's seasonal pattern. In addition, the recent comments from the Federal Reserve Chairman about lower interest rates for next year may help stimulate the economy even more. The jury is still out on whether the lower rates will materialize as members of the Federal Reserve seem to be touting conflicting thoughts about the Chairman's press conference.
In Closing
It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must also consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
The term "perfect storm" used in this article does not mean the trade will be perfect. But, it refers to several events increasing the odds of the seasonal pattern being fulfilled this year.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
