Commodities can be seasonal assets. Fuel and nutritional requirements tend to reflect the weather conditions during the times of the year that are cold and when the weather warms. As February ends and March arrives this week, the old saying that March comes in like a lion and goes out like a lamb. The oldest written reference to the “lion/lamb” proverb comes from English author Thomas Fuller, who included it in a 1732 volume of proverbs, “wise sentences, and witty sayings, ancient and modern.” It then passed to many farmer’s almanacs, but the saying is likely much older than the 18th-century reference.
- The end of winter- Heating fuel demand declines
- The beginning of spring- The driving season in gasoline and injection season in natural gas
- The start of the 2022 crop year
- The 2022 grilling season is on the horizon
- The three reasons 2022 may not be a typical year for seasonality
As the weather warms over the coming weeks, the supply/demand equations for a host of commodities will shift.
While seasonality offers opportunities to traders and speculators in the futures markets, prices tend to adjust far before the seasons change each year. Moreover, in 2022, the economic and geopolitical landscapes suggest that traditional seasonality could go out the window.
The end of winter- Heating fuel demand declines
In a typical year, the end of the winter season is when futures markets are already reflecting spring pricing. As March begins this week, refiners tend to produce less heating oil, and the natural gas demand remains high, but the markets see the light at the end of the peak-season tunnel.
A monthly chart of the heating oil crack spread, a proxy for other distillates, including diesel and jet fuels, often weakens in March. While distillates are year-round fuels, heating oil production usually declines in March anticipating a decline in heating oil demand.
Historically, natural gas tends to reflect the prospects for milder weather during the spring months in March. Natural gas reached annual lows in February, March, and April in 2012, 2016, 2017, and 2021.
The beginning of spring- The driving season in gasoline and injection season in natural gas
The spring and summer seasons are when people tend to put more mileage on their cars as the weather improves. Gasoline demand tends to increase at the end of the winter as refiners shift from distillate to gasoline refining.
The monthly chart shows that gasoline processing spreads often move higher and peak during the spring and early summer months.
Each year, the natural gas market moves from the withdrawal to the injection season during March. As production begins to flow into storage across the US, the supply-demand equation shifts, and prices tend to decline.
In June 2020, natural gas fell to the lowest price in twenty-five years at $1.432 per MMBtu at the end of the second quarter.
The start of the 2022 crop year
As the snow melts across the fertile US plains and other crop-producing countries in the northern hemisphere, farmers begin to plant the new crops in March and April. The early spring marks the time when uncertainty about supplies peaks as the weather during the growing season is the primary factor in crop production each year. Grain and oilseed prices tend to rise during the spring and early summer as Mother Nature determines the weather conditions that determine the agricultural products that feed the world.
The monthly chart of CBOT soybean futures shows that prices often move to annual highs during the spring and summer months.
Uncertainty over the corn crop often pushes prices to highs during the spring and summer each year.
Wheat prices display the same seasonal pattern. Wheat is the primary ingredient in bread, a critical source of nutrition for nearly eight billion people.
The beginning of the crop season is when supply concerns start to increase as prices become as fickle as the weather over the coming months. The fear of drought or floods is always a key concern as the seeds go into the ground.
The 2022 grilling season is on the horizon
Each year, the US grilling season lasts from late May and the Memorial Day weekend through early September and the Labor Day weekend. As barbecues come out of storage across the US and family and friends gather outside, the demand for animal protein tends to rise. Futures markets tend to move higher as animal protein producers deliver cattle and hogs to processing plants in the spring to meet the increased summer requirements. Cattle and hog futures prices tend to move higher as the grilling season approaches and hit seasonal lows as it ends.
Live cattle futures often display seasonal strength in the spring and summer and weakness during the fall and winter months.
The monthly chart shows that feeder cattle futures tend to display seasonal strength during the grilling season.
Lean hog futures display the same seasonal trading pattern in many years.
The three reasons 2022 may not be a typical year for seasonality
While seasonality is a critical factor for energy and agricultural commodities, 2022 is anything but an ordinary year in markets across all asset classes. At least three factors could cause markets to exacerbate or ignore seasonality over the coming months:
- Inflation is at the highest level in over four decades, causing prices of all goods and services to rise. Commodity prices continue to trend higher, despite the Fed’s plans to increase interest rates. The central bank remains far behind the inflationary curve, which is likely to continue the bullish trend.
- Russia is a leading commodity producer, supplying Europe and the world with metals, minerals, energy, and agricultural products. The Russian invasion into Ukraine led to significant sanctions, which could cause embargos, and supply chain bottlenecks, causing price distortions as availabilities decline.
- Markets reflect the economic and geopolitical landscapes. We have not experienced the current level of uncertainty in decades. The technical trend in most commodity markets remain higher, and the trends are always your best friends.
Seasonality is likely to take a backseat in the current landscape. Market participants should expect the unexpected over the coming weeks and months as price variance is likely to remain elevated. Approach all markets with a clear plan for risk and rewards and stick to that plan. Never allow a short-term risk position to become a long-term investment because the price moves contrary to expectations.
Seasonal factors are always critical in all raw material markets, but in 2022, inflation and geopolitical tensions are trumping the weather as the winter comes to an end.
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