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  (RICHARD PERRY/NYT)

 

(RICHARD PERRY/NYT)

Two ETFs to help you profit from crude oil’s ‘sweet spot’ Add to ...

Crude oil prices have a history of moving higher from the middle of February to September. However, its seasonal “sweet spot” is from mid-February to the third week in April. What are prospects for the “sweet spot” this year?

Crude oil has one of the more clearly defined seasonal “sweet spots” among commodities. Between February 12 and April 22, the commodity has gained an average of 9 per cent over the past 30 years with positive results achieved in 21 of those periods. During the past 10 years, crude oil has gained in 9 of those periods for an average return of 16.87 per cent.

Several annual recurring events happen during the annual “sweet spot”: Demand for crude oil ramps up in mid-winter for heating purposes and demand continues to grow into spring when manufacturing activity in the U.S. typically expands. A subsequent period of strength for oil prices from late June through to the end of September is attributed to demand from the summer driving season. Gains in the price of oil during the summer months average 9.6 per cent.

What about this year? Demand resulting from economic growth is expected to accelerate. According to the OECD, real GDP growth in the world is expected to accelerate from 2.7 per cent in 2013 to 3.6 per cent in 2014 and 3.9 per cent in 2015. Growth is expected to be notable in the United States, Canada, Europe, Japan and China.

Weather is an important factor influencing the price of oil during the winter months. Colder than average temperatures in the U.S. Northeast over recent weeks has “fueled” demand for heating oil, the result of which has supported the price of the energy commodity since mid-January. The demand pressures during colder than average years, such as this one, have been conducive to a stronger period of seasonal strength than warmer years. Returns during the period of seasonal strength of the eight coldest winters over the past 30 years have averaged a gain of 12.94 per cent. This compares to an average gain of 6.58 per cent during the eight warmest winters over the past 30 years. Weather trends continue to point to lower than average temperatures throughout February.

Crude oil’s technical profile is improving. Crude is developing a base building pattern between $91.24 and $100.75 (U.S.) per barrel. Crude recently moved above its 20– and 50-day moving averages and began to outperform equity benchmarks in mid-January. A move above its current trading range implies upside potential to $111 per barrel where previous resistance exists.

A variety of Exchange Traded Funds tracking crude oil are available. The most actively traded Exchange Traded Funds is the United States Oil Fund, which consists of listed crude oil futures contracts. Another eight crude oil ETFs with varying characteristics are available on U.S. Exchanges. In Canada, Horizons Exchange Traded Funds offers the Horizons NYMEX Crude Oil ETF. Units trade in Canadian Dollars and are hedged against U.S. Dollar currency risk. Leveraged Bull and Bear products are also available.

Don and Jon Vialoux are authors of free daily reports on equity markets, sectors, commodities, and Exchange Traded Funds. Daily reports are available at http://TimingTheMarket.ca/ and http://EquityClock.com. They also are Research Analysts for Horizons ETFs Management (Canada) Inc. All of the views expressed herein are their personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons ETFs Management (Canada) Inc.

Follow on Twitter: @EquityClock

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