Crude Oil: Can it Go Lower, From a Seasonal Point of View?

• I received an email Thursday that told me the WTI Crude Oil market can go lower. Of course it can, as we saw back in April 2020, the market can go to at least (-$40) per barrel if it so chooses. 
• WTI's market structure is also ripe for continued selling given Watson continues to hold a net-long futures position wheel commercial  interest whittle away at the markets's backwardation/inverse.
• Seasonally, there is still time and space for the spot-month WTI contract to move lower as well. 

Around midday Thursday (September 5), a message popped up in my email with the subject line reading, “It can go lower”. Given my reputation as a perpetual market bear[i], I had to open it to see what market was doomed[ii]. As it turns out, it was a Brief talking about Crude Oil and how the market had found “minimal support from OPEC+…after the group agreed to delay planned production increases by two months”. A quick look back at Wednesday’s session and we see the spot-month West Texas Intermediate (WTI) contract (CLV24) posted a low of $68.82, its lowest price since of 2024. For the record, the December 2023 low was $67.71. As Thursday morning turned to afternoon, the spot-month contract had posted a low of $68.88 and was sitting near its low as I type this sentence. 

Some of the pressure in the market was likely coming from Watson, my name for the algorithm-driven investment industry in general, with the most recent CFTC Commitments of Traders report (legacy, futures only) showing noncommercial traders held a net-long futures position of 226,699 contracts as of Tuesday, August 27. Given the spot-month contract was down about $5.20 from Tuesday-to-Tuesday, Watson has likely been liquidating some of its net-long futures position, activity that has extended through Thursday. But we can see pressure has also been coming from the commercial side of the market with the spot futures spread falling from a backwardation (inverse for you non-New Yorkers) of $0.90 to about $0.65 this week. Before we throw too much bearish dirt on crude oil we have to remember what Horton the Elephant[iii] taught us, when it comes to a storable commodity, “An inverse is an inverse no matter how small”, and inverses are “always[iv]” bullish. Turning our attention back to the aforementioned email, we know the spot-month WTI contract can go lower. In fact, back in April 2020 it proved that a commodity can actually go below $0 as it fell to (-$40) per barrel. That was a fun day. 

The conversation gets more interesting if we apply seasonal analysis. As I talked about last time with US stock indexes, seasonal analysis shows us what a contract or market TENDS to do over the course of a 12-month period. In the Energies sector, I study seasonality using a calendar year. Also, my seasonal studies are based on indexes which are averages of averages of weekly closes rather than flat price. I know this is different than most, so why do I do it this way? Because it works better. It’s that simple. Lastly, seasonality can be used to track how a contract/market tends to move over time and space. For instance, a look at the seasonal study for WTI crude oil shows: 

• The spot-month contract tends to trend down from the last weekly close of June through the third weekly close of August, a span of about 7 weeks
  • The 5-year index shows an average decrease of 8%
  • The 10-year index shows an average drop of 6%
• After that, the spot-month contract tends to rally through the first week of October, another 7 weeks
  • Showing a gain of 7% on its 5-year index 
  • And a gain of 3% on its 10-year index
• Before turning lower again through the third week of December, roughly 10 weeks down the road.
  • With the 5-year index showing a loss of 15%
  • And the 10-year sliding 13%

Let’s break this down to time and distance, starting with time.

• The time span from the high weekly close (last week of June) through the low weekly close (third week of December is 24 weeks, nearly half the year. 
• The average distance the market tends to move over the course of its normal downtrend is 16% for both 5-year and 10-year indexes. 

Now let’s look at the 2024 market, again with the spot-month contract posting a new calendar year low this week. 

• The market posted a high weekly close of $86.91 the first week of April
  • This week’s low of $68.82 is a decrease of 21%
  • And has spanned 22 weeks to this point

Can the spot-month WTI contract go lower? 

• The 2024 selloff is fast approaching the average time span of 24 weeks. 
  • However, if the 2024 break lasts through the normal seasonal low weekly close the third week of December, the week count would be up to 36 weeks
  • And if we want to have some fun with numbers, that would be exactly half-again the seasonal average 
• It has already posted a larger than average seasonal selloff. However, given these indexes are based on averages of averages, market moves will be greater or smaller over time. 
  • If distance were to be half-again the average, similar to time, it would mean a 24% decrease through the low weekly close putting a downside target near $66.05.

Again, then, can the spot-month WTI contract go lower? Yes. Will the spot-month WTI contract go lower? Let’s watch and find out. 
 

[i] As is usually the case, reputation doesn’t equal reality. I’m bearish when markets tell me to be bearish, bullish when markets turn bullish. 

[ii] No, I don’t randomly click on emails that come in. This one was from my friends at , so I felt confident it wouldn’t be the end of my hard drive. 

[iii] Of Dr. Seuss fame.

[iv] Setting aside the Vodka Vacuity (There are no Absoluts in markets) for a moment. 

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