Seasonality suggests gas prices can go lower

Key Points

• Energy prices have soared following the 2020 Covid lows
• Nevertheless, crude oil and unleaded has peaked in June 2022 and have been trending lower still
• Seasonality suggests a strong possibility that the price of gasoline is headed lower still

Unleaded gas seasonality

Unleaded gas futures are a highly cyclical market. Demand tends to ramp up as the first half of the calendar year progresses. Demand then slows as summer heads into fall. Finally, demand falls off drastically as the winter months approach. The typically annual pattern for price reflects this cyclical demand.

The chart below displays the Annual seasonal trend for unleaded gas futures and highlights the two key periods for gasoline traders. The sharp falloff in price in the year's second half is unmistakable.

Unleaded gas futures contracts are for 42,000 gallons (which equals 1,000 barrels), and a 1-point movement in the contract price equals $420. 

Key period #1

Let's first focus on the period that extends from the close on Trading Day of the Year (TDY) #167 through the close on TDY #177. This is a very short window. Nevertheless, the results are compelling. For 2022 this period extends from the close on 2022-08-24 through the close on 2022-09-08.

The chart below displays the cumulative $ gain/loss for unleaded gas futures only during this seasonally unfavorable period.

The table below presents a summary of performance during this seasonally unfavorable period. It is not a pretty picture.

Key period #2

Key period #2 simply extends key period #1 through TDY #226. For 2022 this period extends from the close on 2022-08-24 through the close on 2022-11-16.

The chart below displays the cumulative $ gain/loss for unleaded gas futures only during this seasonally unfavorable period.

The table below presents a summary of performance. It is not a pretty picture.

A bullish twist

Let's look at those times when TDY is NOT between #168 and #236. We will give the bullish case the benefit of the doubt during these periods if price action is acting well. To rank price action as favorable or unfavorable, we will use a 55-day exponential moving average with a 1-day lag, i.e., if the price closes above the 55-day EMA on Friday's close, we will deem the following Tuesday (assuming no holiday on Monday) as favorable.

If a) the close the trading day before last was > 55-day EMA AND b) today is NOT Trading Day of Year #168 through #236, we will deem the trend favorable.

The table below displays the cumulative hypothetical $ + (-) for unleaded gas futures when a and b above are true.

What the research tells us…

A significant risk is always associated with relying solely on seasonality to trade. With even the most consistent seasonal trends, there is no guarantee that it will work the next time. That said, in the case of unleaded gas, history suggests, given the bearish case the benefit of the doubt in the months ahead - particularly if overall price action remains bearish.