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Seasonality: The Impact on the Energy Markets

January 3, 2019 by Daniels Trading| Ag Marketing

Seasonality refers to the fluctuations in the value of an asset in relation to the time of year. Although predicting the effect of its impact isn’t an exact science, seasonality is a futures market phenomenon that traders and investors should take into account.

Energy is one asset class where the impact of seasonality merits extra attention. Whether you’re hedging risk by implementing weather trading strategies or a short-term crude oil speculator, understanding how the calendar can affect price is an integral part of achieving your trade-related objectives.

Seasonal Patterns in WTI Crude Oil, and Henry Hub Natural Gas

Many factors influence the value of energy, with futures market participants playing a big role in determining its market price. Regardless of the current global energy dynamic, it’s important to remember that futures traders are anticipatory in mindset. They’re not interested in what energy is worth today ― tomorrow’s value is what counts. This is where seasonality comes into play: when future supply and demand levels are projected in order to determine an efficient price today.

As a result, the four North American seasons have a significant influence on the futures markets. Below are the basic tendencies of the leading unrefined energy futures contracts:

  • West Texas Intermediate (WTI) Crude Oil: The pricing of WTI futures is full of nuance. However, the general pattern is appreciation during the North American spring/summer and depreciation in the fall/winter. Conventional wisdom cites peak demand for refined fuels beginning Memorial Day and ending Labor Day. This typically produces a bump in WTI futures pricing as refiner needs increase, followed by a lull going into the winter months.
  • Henry Hub Natural Gas: Natural gas futures exhibit unique seasonal tendencies. Prices typically peak in anticipation of cold-weather heating consumption, frequently during the fall and early winter months. Fall 2018 provided an extreme illustration of this circumstance, featuring an almost 60% rally in January 2019 Henry Hub natural gas futures.

While the prices of WTI and Henry Hub futures do not adhere to seasonality 100 percent of the time, the tendencies are very real. In fact, futures traders are known to engage derivative products designed for weather trading in order to manage anticipated environmental outliers.

Get the basics of trading crude oil futures and understand the top reasons for  participating in our guide. Get it here ->>

Refined Fuels: Gasoline and Heating Oil

If you’ve ever gassed up your SUV on the Fourth of July or adjusted your thermostat in mid-December, then you are familiar with astronomically high energy prices. The reason is simple ― seasonal supply and demand, right?

Unfortunately, it’s a little more complicated than the old supply and demand curve. Factors such as refiner output, geopolitical tensions, taxation and storage capacity also impact the price of gasoline and heating oil. However, the most obvious examples of seasonality in futures trading do involve the premier refined energy contracts RBOB gasoline and NY Harbor heating oil:

  • RBOB Gasoline: Because gasoline is a product of crude oil, RBOB and WTI are consider to be tied at the hip. Again, the summer months typically yield higher pricing due to increased refined fuel consumption. However, holidays such as Thanksgiving and Christmas also serve to boost RBOB futures as travel demand grows, even during times of lagging WTI.
  • NY Harbor Heating Oil: It makes sense that the price of heating oil futures would rise the same way natural gas does ahead of cold winter weather. However, this is not typically the case, with prices peaking in late winter/early spring (February, March, April) and lagging during late fall/early winter (October, November, December). This tendency is due to the seasonal patterns in crude oil pricing and decreased demand for heating oil in the spring, summer and early fall months.

Experts in weather trading monitor the futures pricing of refined products closely. While gasoline and heating oil are linked to global crude, the relationship is complex. Adverse or extreme weather patterns can drive both consumer demand and production, taking the impact of seasonality on the energy markets to a whole other level.

Is There Opportunity in Weather Trading?

Entire books have been written on the correlations between the futures markets and the weather. Ultimately, both are dynamic systems that maintain an evolving dialogue with one another. Understanding the relationship can be extremely challenging.

If you are interested in seasonality, futures, and the applications of weather trading, a great place to explore the possibilities is through Daniels Trading’s expert advice and advisories portal.

Introduction to Crude Oil Futures

Filed Under: Ag Marketing, Tips & Strategies

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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