Any Seasonality for Oil Prices?

July 24, 2012 • Posted in Calendar Effects, Commodity Futures

A reader asked whether oil prices exhibit seasonality. To check, we investigate three monthly series: (1) spot prices for West Texas Intermediate (WTI) Cushing, Oklahoma crude oil since the beginning of 1986 (26+ years); (2) nearest expiration futures prices for this same crude oil since April 1983 (29 years); and, (3) and prices for the iPath S&P GSCI Crude Oil TR Index exchange-traded notes (OIL) since August 2006 (only about six years). Using monthly prices from the respective inception months through June 2012, we find that:

The following chart shows average change in WTI crude oil spot price by calendar month over the available sample period, and over two equal subperiods. Notable indications are:

  • Oil price tends to rise with some consistency during January, April, May and August.
  • Oil price tends to fall with some consistency during November and December.

For additional perspective on variability, we look at standard deviations of price changes by month.

The next chart shows average change in WTI crude oil spot price by calendar month over the available sample period, along with one standard deviation year-to-year variability ranges. Variability ranges are generally large compared to average monthly changes, such that the averages tend to be difficult to exploit. Variability by month is highest (lowest) for March, August and December (January and July), ranging from 6.4% to 12.3%.

What about results for crude oil futures?

The next chart shows average change in WTI crude oil near-expiration futures price by calendar month over the available sample period, and over two equal subperiods. Results are generally similar to those for spot prices. Year-to-year variability ranges by calendar month are also similar.

Again, for additional perspective on variability, we look at standard deviations of price changes by month.

The next chart shows average change in WTI crude oil near-expiration futures price by calendar month over the available sample period, along with one standard deviation year-to-year variability ranges. Variability ranges are again generally large compared to average monthly changes, such that the averages tend to be difficult to exploit. Variability by month is again highest (lowest) for March, August and December (January and July), ranging from 7.3% to 11.4%.

How do returns for OIL compare?

The final chart compares average monthly changes by calendar month for WTI crude oil spot price, WTI crude oil near-expiration futures price and OIL price over the respective available sample periods. As noted above, results for the two longer series are very similar. However, the very short OIL series deviates considerably from the other two series for some months, most notably January, February and August, emphasizing the large variabilities in the data.

Even for December, OIL has strongly positive returns for two of the six years in the available sample.

In summary, evidence from simple tests supports perhaps some belief that crude oil tends to have strong and weak months of the year, but high year-to-year volatility by month inhibits exploitation.

Cautions regarding findings include:

  • Sample periods for all three series (emphatically for OIL) are short for calendar-based analysis.
  • Especially given the high variability in results, more detailed modeling is important in translating average results into portfolio-level outcomes.
  • To the extent that distributions of monthly price changes are wild, the average and standard deviation statistics lose their predictive interpretations.

For energy sector seasonality, see “Sector Performance by Calendar Month”.

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