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February 27th, 2015 Newsletter

Looking to exploit seasonality in the Unleaded/ Heating oil relationship and Crude Oil Bears Gain Downside Momentum.

February 27th, 2015 - Issue #776

In This Issue

1. Seasonality in the Energy Sector - Special Free Trial
2. Hot Market report: Crude Oil Bears Gain Downside Momentum
3. Economic Calendar

1. Looking to exploit seasonality in the Unleaded/ Heating oil relationship - Special Free Trial


Futures spreads are another tool traders should be familiar with. In short a spread will consist of being long one commodity and short another. There intra commodity spreads, like being long May Corn and short December corn and there are inter commodity spreads like being long May Wheat and Short May corn. I personally like spreads as they can at times offer a little more staying power. that does not mean that spreads are less risky but in my opinion they can provide a trader with more room to manuever. There is an excellent article about future spreads written by my colleague at Cannon Trading, which you can read here.

There is also a great source, I personally like, MRCI.com. MRCI produces many different reports about seasonal tendecies and more. One of their reports is the monthly spread idea report. In this month, one spread caught my eyes and it is the long May unleaded gas and short the May heating oil.
Below is some of the logic shared by MRCI for this trade, which I am sharing with you:

Some seasonal movements that seem driven by little apparent logic may actually be generated by fundamentals known best to those in a related commercial activity. Others, however, may be perfectly obvious upon careful consideration.

For example, consider gasoline and heating oil. We have many times discussed how seasonal patterns of consumption for these two primary petroleum products vary inversely. When consumption of heating oil is greatest during the cold of winter, consumption of gasoline is least because driving conditions are worst. Conversely, when consumption of gasoline is greatest because driving conditions are best, school is out, and families go on vacation, consumption of heating oil is least because temperatures are highest.

But it is during periods of accumulation and liquidation when markets move most. Why? Because a primary function of markets is not so much to reflect but rather to anticipate. Everybody knows when consumption is high --- which is why price is already high. Reward goes to those who take the risk of anticipating what the future will bring rather than to those who know what everybody else knows.

And thus it is that, as winter draws to a close, gasoline has usually outperformed heating oil. Distributors ever more aggressively liquidate their stocks of heating oil in order to avoid getting caught with too much inventory when consumption falls off a cliff. In contrast, the industry knows that, as temperatures warm, driving conditions improve. As they do, daily consumption of gasoline rises. But the industry also knows it must aggressively accumulate inventory of gasoline for the upcoming vacation and driving season, the traditional opening of which is Memorial Day weekend (last Monday in May). This combination of rising consumption and inventory accumulation conspires to accelerate demand for gasoline, usually driving price higher during spring. In fact, MRCI has found that May Gasoline has closed higher both on about March 31 than on about January 27 for the last 16 years consecutively and also on about March 9 than on about February 1 in 15 of the last 16.

When combined with declining consumption of heating oil and inventory liquidation, gasoline has regularly outperformed heating oil in late winter. For example, the Long May Gasoline/Short May Heating Oil spread has closed more favorably toward gasoline on about March 26 than on about February 23 in 25 of the last 29 years and in 17 of the last 18 --- in only 5 of which would any daily closing drawdown have exceeded 2.92 cents/gallon. (Each 1.00 cent/gallon is worth $420.)

From last May through December the spread traded at discounts in a range mostly between -5.00 and -10.00 cents/gallon. But then in January it followed its normal pattern, breaking out of that range as gasoline began seriously outperforming heating oil. By the end of the month, it had converted a discount to a premium as it reached +3.49. It has since been retesting even money.

Crude Oils Has it now exhausted its potential? One might think not. Although an unexpected, extreme cold snap might force this spread back to a modest discount, long-term charts show that last year’s spread traded a premium of +11.26 --- and that was the lowest extreme premium such spreads have reached in each of the last 14 years prior to their respective expiries. Seasonal logic might suggest this spread has still higher levels to explore before May.


 

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Seasonal Disclaimer - Seasonal tendencies are a composite of some of the more consistent commodities futures seasonals that have occurred over the past 15 years. There are usually underlying fundamental circumstances that occur annually that tend to cause the futures markets to react in a similar directional manner during a certain calendar period of the year. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past or will in the future achieve profits utilizing these strategies. No representation is being made that that price patterns will recur in the future. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. Results not adjusted for commission and slippage

2. Hot Market Report - Crude Oil Bears Gain Downside Momentum


From our friend Jim Wyckoff

Jim has an excellent daily newsletter where he reviews different markets, alerts you for potential trades and much more. Included is his great bi-weekly newsletter with charts and a little longer term outlook. We recommend checking out his website, educational CDROM, and services at www.jimwyckoff.com click on image below to enlarge

Crude Oils

See on the daily bar chart for April Nymex crude oil futures that prices remain in a downtrend. The bears late this week have gained fresh downside technical momentum to suggest a challenge of strong chart support at the recent multi-year low. Prices on Friday morning were also in danger of posting a bearish weekly and monthly low close, which would give the bears significantly more technical power.

3. Economic Calendar

Source: Moore Research Center, Inc.

Date Reports Expiration & Notice Dates
03/02
Mon
7:30 AM CST - PCE Prices-Core(Jan)
7:30 AM CST - Personal Income & Spending(Jan)
9:00 AM CST - Construction Spending(Jan)
9:00 AM CST - ISM Index(Feb)
FN: Mar Orange Juice(ICE)
Mar Sugar-11(ICE)   
03/04
Tues
 1:00 PM CST - Auto & Truck Sales(Feb)    FN: Mar RBOB & ULSD(NYM)
LT: Feb Butter(CME)
Feb Milk(CME)
Feb Butter Options(CME)
Feb Milk Options(CME)
03/05
Wed
6:00 AM CST - MBA Mortgage Purchase Index
7:15 AM CST - ADP Employment Change(Feb)
9:00 AM CST - ISM Services(Feb)
9:30 AM CST - API & DOE Energy Stats
1:00 PM CST - Fed's Beige Book(Mar)
2:00 PM CST - Dairy Products Sales
6:30 AM CST - Challenger Job Cuts(Feb)
7:30 AM CST - USDA Weekly Export Sales
7:30 AM CST - Initial Claims-Weekly
7:30 AM CST - Productivity-Rev(Q4)
7:30 AM CST - Unit Labor Costs-Rev(Q4)
9:00 AM CST - Factory Orders(Jan)
9:30 AM CST - EIA Gas Storage
3:30 PM CST - Money Supply
03/06
Thurs
7:30 AM CST - USDA Weekly Export Sales
7:30 AM CST - Initial Claims-Weekly
7:30 AM CST - Retail Sales(Jan)
7:30 AM CST - Retail Sales-Ex Auto(Jan)
9:00 AM CST - EIA Gas Storage
3:30 PM CST - Money Supply

03/07
Fri
7:30 AM CST - Ave Workweek & Hourly Earnings(Feb)
7:30 AM CST - Nonfarm Payrolls(Feb)
7:30 AM CST - Trade Balance(Jan)
7:30 AM CST - Unemployment Rate(Feb)
2:00 PM CST - Consumer Credit(Jan)  
LT: Mar Canadian Dollar Options(CME)
Mar Currencies Options(CME)
Mar Live Cattle Options(CME)
Mar US Dollar Index Options(ICE)
Apr Cocoa Options(ICE)  
03/09
Mon
       LT: Mar Cotton(ICE)   

* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.

** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.

*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!

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