Seasonality refers to supply and demand fluctuations that occur thanks to the time of year. Seasonality often impacts the commodities market. For instance, sweet corn is “in season” from early July until late September. During these months, there will be a spike in supply, which should drive down demand. However, outside of these months, supply will lag which will drive demand.
Although seasonality is not an exact science, it is more predictable than outlier events like a global crisis. Because it is a bit predictable, traders should take the time to understand the concept and work it into their investing strategy. One of the assets that seasonality seems to impact most is energy. No matter if you’re trading crude oil commodities or are looking to hedge risk with weather-trading strategies, understanding seasonality should serve you well.
How Seasonality Affects The Futures Market
Energy assets are often traded on the futures market, where traders have a significant impact on the future market price. Traders on the futures market have an anticipatory mindset, where they purchase contracts based on what they think is going to happen. The futures market is exciting because it doesn’t so much have to do with what investors think energy is worth today, but rather than they feel the value will be at some point down the road, whether it’s:
- One year from now
- Five years from now
Accordingly, seasonality has a significant impact on the futures market as investors look to find an accurate price that reflects the actual value of the commodity. Because there are four different seasons in North America, seasonality becomes even more critical.
How Seasonality Effects The Energy Market
Let’s take a look at two of the more common futures energy contracts in North America to see just how critical seasonality can be. West Texas Intermediate Crude Oil and Henry Hub Natural Gas are two of the leading unrefined energy future contracts. West Texas routinely appreciates during spring and supper and then depreciates in the second half of the year. A spike in demand typically occurs between Memorial Day and Labor Day.
Henry Hub, on the other hand, is a bit opposite. This futures contract peaks as winter approaches since investors expect an increase in demand as consumers’ heat consumption increases. Consider some of the futures trades that investors placed in Fall 2018, where they drove the anticipated January 2019 price by more than 60 percent.
What About Weather Trading?
Most investors think about weather trading alongside seasonality, and rightfully so. Experts have long examined the correlation between weather patterns and the futures market. Learning more about weather trading could make you a better futures investor, as it would provide you with more anticipatory insight.
However, both weather trading and the futures markets are difficult topics to understand. New investors in Manhattan should take the time to learn about both before entering into the market. Extensive knowledge will help mitigate losses and will put investors in the best position for success.
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