Seasonal Sector Trades: Another Opportunity for Crude Oil Bears By: By Christopher Mistal & Jeffrey A. Hirsch | September 08, 2015 | Email | Print

Seasonally speaking, crude oil tends to make significant price gains in the summer, as vacationers and the annual trek of students returning to college in August creates increased demand for unleaded gasoline. The market can also price in a premium for supply disruptions due to threats of hurricanes in the Gulf of Mexico. However, towards mid-September, we often see a seasonal tendency for prices to peak out, as the driving and hurricane seasons begin to wind down. Crude oil’s seasonal decline is highlighted in yellow in the following chart.

 

 

Shorting the February crude oil futures contract in mid-September and holding until on or about December 9 has produced 21 winning trades in the last 32 years. This gives the trade a 65.6% success rate and theoretical total gains of $99,860 per futures contract. Following three consecutive years of losses, this trade has been successful for three years straight. A sizable portion of last year’s crude collapse from over $100 a barrel in June to the lows in January was captured by this trade resulting in its second best profit to date.

 

 

Many of the fundamental issues that triggered crude’s decline remain in place despite the 60-plus-percent decline in price over the past year. Global growth is still anemic, U.S. domestic supply is still growing, the U.S. dollar is still near multi-year highs and OPEC is still pumping as much as possible in an apparent bid to shake out higher-priced production. Downside is likely limited this year as lower prices are beginning to slow the growth of new supply and demand has been improving, at least according to weekly EIA data. Crude’s recent bounce from under $40 per barrel to present levels combined with weak seasonal factors is an attractive setup to this short-term short trade. 

 

 

ProShares UltraShort Bloomberg Crude Oil (SCO) is the preferred vehicle to take advantage of seasonal weakness. SCO’s benchmark is the Bloomberg WTI Crude Oil Sub index which is comprised entirely of crude oil futures contracts. SCO is designed to return 200% of the inverse of the daily move of this index and has approximately $1 billion in assets. Its expense ratio of 0.95% is about average for a leveraged, inverse ETF.

 

Crude oil’s recent strength has resulted in a brisk for SCO. As a result, stochastic, relative strength and MACD Buy indicators are all negative. SCO could be bought on dips below $80.10. SCO will be tracked in the Almanac Investor ETF Portfolio. If purchased, a stop loss at $72.00 is suggested.