Last month I wrote a post about higher gas prices coming to the pumps entitled Pull Out The Walking Sticks: Gas Prices Are Going Up. At the time I was focused on the Libyan conflict as one of the reasons gas prices would rise. The other factor I mentioned was seasonality:
In addition, we are in a seasonally strong time for energy. According to the Commodity Traderâ€™s Almanac, February through May is crude oilâ€™s strongest period. Buying in February and selling in May offers an 85.2% win ratio, with the trade working 23 out of the past 27 years.
Since that post, I have received a couple of emails on what I thought about the energy trade this year (post Japan’s earthquake) and how the strategy performed over the past ten years.
This is the chart I put up last month:
I started writing this post before the earthquake hit Japan. Japan is the third largest economy in the world. The massive earthquake and tsunami that struck Japan may have a short term impact on oil prices. Japanâ€™s economy will be shut down for a few days or longer. Their need for oil will drop, until they start rebuilding from the damage.
We are now starting to see the energy markets get back on track as Japan’s increased need for oil in the future is priced into the energy markets.
In addition, let’s not forget about seasonal strength. This time of year is historically strong for energy. I created a backtest to show the results of buying XLE the last trading day of January and holding the investment until the end of May:
The strategy produced a 9.31% average annual return (from Jan 31st 2000 to April 6th 2011). Not too bad for only being invested in the market for 4 months of the year.
I would expect energy prices to continue to rise from here. Don’t forget there is still conflict in Libya and other parts of the Middle East that continue to impact oil prices – even if the media has moved on to other “stories of the day”.
Disclaimer: I/my client(s) are long XLE and I may initiate further positions within the next 72 hours.