One of the more reliable seasonal trades each year is in the energy sector. The average optimal time to own the U.S. equity energy sector is from February 25th to May 9th. Thackray’s 2012 Investor’s Guide notes that the trade has been profitable in 24 of the past 28 periods. Average gain per period was 7.7 per cent.
The seasonal trade in the Canadian energy equity sector is slightly different and slightly more profitable. Its period of seasonal strength is from the end of January to the end of May. The trade has been profitable in 17 of the past 20 periods. Average gain per period was 11.5 per cent.
Reasons for seasonal strength include strong seasonal demand for crude oil, rising gasoline prices prior to start of the summer driving season, seasonally strong first-quarter earnings and cash flows related to the winter heating season, encouraging news on expansions and capital spending plans announced at annual meetings, and revisions in value and extent of oil and gas reserves. Canadian energy equities also benefit from exploration and development news during the winter drilling period.
What about this year? Prospects are above average. Crude oil prices are expected to rise as demand, particularly from China, increases with improving economic conditions. The exception is Europe where demand is expected to be flat. However, European crude oil prices also are expected to rises as Europe diverts oil imports from Iran to other sources. Brent crude prices already are rising. Gasoline prices in North America are expected to increase almost 25 per cent by the end of May, partially due to a recovery in crack spreads related to the permanent closure of about one million barrels of refining capacity. Exploration and development during the winter drilling season is not expected to have a significant impact this year.
On the charts, the sector currently has a mixed picture. Natural gas prices currently are deeply oversold and trying to recover. Natural gas inventories remain high and several North American natural gas producers recently announced production cut backs. Short-term momentum indicators show that West Texas Intermediate (WTI) crude oil prices currently are short-term oversold after falling from $103.74 (U.S.) at the beginning of January but have yet to show signs of bottoming. In contrast, energy equity indices and related ETFs in the U.S. and Canada have moved higher with strength in equity markets. Their short-term momentum indicators currently are overbought. Particularly intriguing on the charts is the S&P/TSX Capped Energy Index and its related ETFs. It is forming a potential bullish “head and shoulders reversal pattern.” A break above $18.19 implies intermediate upside potential to $22.80. Preferred strategy is to enter the sector on weakness during the next few weeks for a seasonal trade lasting until May when technical indicators bottom.
Macro events also could have an impact on crude oil and energy equity events during the current period of seasonal strength. Iran has threatened to close down the Straits of Hormuz if attacked by outside sources. Defense Secretary Leon Panetta reportedly said on Friday that he “believes there is a strong likelihood that Israel will strike Iran in April, May or June”. In addition, political stability continues to weaken in Nigeria, another major oil producer.
A wide variety of exchange traded funds in the energy sector are available on North American equity exchanges. U.S. exchanges list 27 Energy ETFs. A list is available here.
Another 24 U.S.-based ETFs trade oil, gasoline and natural gas. A list is available here. The most actively traded U.S. listed ETF is the Energy Select Sector SPDR . Canadian exchanges list seven energy equity ETFs and 11 oil and natural gas ETFs. The most actively traded Canadian equity ETF is iShares on the S&P/TSX Capped Energy Index .
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by JovInvestment. JovInvestment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/