Does crude oil (an important part of commodity indexes) exhibit an exploitable price seasonality? To check, we examine three monthly series:
- Spot prices for West Texas Intermediate (WTI) Cushing, Oklahoma crude oil since the beginning of 1986 (34+ years).
- Nearest expiration futures prices for crude oil since April 1983 (37+ years).
- Prices for United States Oil (USO), an exchange-traded implementation of short-term crude oil futures since April 2006 (14+ years).
We focus on average monthly returns by calendar month and variabilities of same. Using monthly prices from respective inceptions of these series through October 2020, we find that:
The following chart shows average WTI crude oil spot returns by calendar month over the full sample period and two equal subperiods. Average monthly return during 1986-2020 (2004-2020) is 0.61% (0.71%). Notable points are:
- Price tends to rise with consistency during March through May.
- Price tends to fall with consistency during November and December.
- Price is consistently unchanged during October.
For additional perspective, we look at standard deviations of returns by calendar month.
The next chart shows average WTI crude oil spot returns by calendar month over the full sample period, along with one standard deviation variability ranges. Notable points are:
- Variabilities are large compared to average returns, ranging from 6.7% to 14.2%, making average findings difficult to exploit.
- Variability is largest for May, March, August and December.
- Variability is smallest for July and September.
For a less noisy view, we zoom out to calendar quarters.
The next chart shows average WTI crude oil spot returns by calendar quarter over the full sample period, along with one standard deviation variability ranges. Notable findings are:
- The fourth quarter is very weak.
- The third quarter is especially volatile.
Spot returns are not directly exploitable by investors (commodity speculators). What about results for crude oil futures?
The next chart shows average WTI crude oil nearest futures returns by calendar month over the full sample period and two equal subperiods. Average monthly return during 1983-2020 (2002-2020) is 0.57% (0.88%). Results are very similar to those for spot prices.
For additional perspective, we look at standard deviations of returns by month.
The next chart shows average WTI crude oil nearest futures returns by calendar month over the full sample period, along with one standard deviation variability ranges. Variability ranges are again large compared to average returns, such that average findings are difficult to exploit. Variability by month is again highest (lowest) for March, August and December (April, June, July and September), ranging from 6.5% to 13.4%.
Findings are somewhat more exploitable than those for spot price changes, but data do not account for the roll yield inherent in maintaining a continuous crude oil futures position.
How about the easily investable USO?
The next chart shows average USO returns by calendar month over the full sample period, along with one standard deviation variability ranges. Results are different from the above two longer series. Notable points are:
- Average returns are materially positive only for June and materially negative for July-January and March.
- Variability ranges are again large compared to average returns, such that average findings are difficult to exploit.
Finally, we directly compare results for the three price series.
The final chart compares average WTI crude oil spot returns, nearest futures returns and USO returns by calendar month over respective full sample periods. The most consistent findings is weakness in November and December. Easily tradable USO (focused on more recent data) is notably different from the longer underlying series for most months.
In summary, evidence from simple tests supports some belief that crude oil tends to have strong months (March-April) and, especially, weak months (November-December), but high variability inhibits exploitation.
However, USO traders relying on prior crude oil spot and futures calendar patterns are likely disappointed.
Cautions regarding findings include:
- Sample periods for all three series (emphatically for USO) are short for calendar-based analysis.
- As shown, crude oil returns are volatile, such that returns for a given year may differ dramatically from averages.
- To the extent that distributions of monthly returns are wild, average and standard deviation lose predictive meaning.
For energy sector seasonality, see “Sector Performance by Calendar Month”.
Frequently Asked Questions
What is crude oil seasonality in commodity investing?
Crude oil seasonality is a recurring calendar-based pattern in oil prices, such as consistently stronger or weaker average returns in particular months or quarters. In the analysis of West Texas Intermediate (WTI) crude oil, the average monthly spot return was 0.61% over 1986-2020, with strength in March-May and weakness in November-December.
Does crude oil show a seasonal pattern that investors can exploit?
Crude oil shows some seasonal tendencies, with strong months in March-May and especially weak months in November-December, but high variability inhibits exploitation. Monthly standard deviations of WTI spot returns range from 6.7% to 14.2%, which is large compared to average returns. The most consistent finding across spot, futures and USO series is weakness in November and December.
How is seasonality in crude oil prices tested using monthly returns?
Crude oil seasonality is tested by calculating average returns and standard deviations of returns by calendar month (and by calendar quarter) for three monthly series through October 2020. The series are WTI Cushing spot prices since 1986, nearest-expiration crude oil futures prices since April 1983, and United States Oil (USO) since April 2006. Results are also shown for the full sample and two equal subperiods.
How do USO returns compare to WTI crude oil spot and futures seasonal patterns?
USO seasonal results differ materially from the longer WTI spot and nearest futures series for most months. USO average returns are materially positive only in June and materially negative in July-January and March, while spot and futures show similar patterns to each other. Traders relying on prior spot and futures calendar patterns in USO are likely to be disappointed.
What are the limitations of using crude oil seasonal patterns to trade?
Crude oil seasonal patterns are limited by short sample periods, especially for USO (since April 2006), which is short for calendar-based analysis. Returns are volatile, so a given year may differ dramatically from the averages, and if monthly return distributions are wild, averages and standard deviations lose predictive meaning. The futures results also do not account for the roll yield inherent in maintaining a continuous futures position.