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Weekly Spread Commentary - Time to consider a Gasoline & Heating Oil spread?

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Onward to Even Money?

A trader entering a spread with the long side at a discount would love to see it go to a premium. But first it must go through even money. Will two candidates this week be able to do so?

Consider gasoline and heating oil. Their patterns of consumption vary inversely, of course. That of gasoline peaks in July/August, the height of the summer vacation and driving season, just when temperatures are hottest and consumption of heating oil at its nadir. In contrast, consumption of heating oil peaks in winter, just when driving conditions are worst.

In between those two peak seasons are so-called shoulder months. For example, the driving season traditionally ends Labor Day (first Monday in September). Children return to school, and families drive to soccer practice rather than to national parks. Temperatures cool but are not yet cold. Refiners use these months to make the switchover from maximizing production of gasoline to that of heating oil, temporarily slowing production of each.

One would logically think that gasoline for delivery in October, for example, deserves a lesser price than heating oil for delivery then. After all, gasoline consumption is slowing whereas the industry is accumulating inventory of heating oil for cold weather. And it normally does. But even that spread can vary considerably during driving season when gasoline demand is greatest.

From 1986 through 2004, these spreads fluctuated quietly around even money. But in 2005, the character of the market changed drastically. Volatility rose sharply, and gasoline most typically traded at a discount --- sometimes an exceptionally large discount. The 15-year seasonal pattern for the October relationship, for instance, suggests gasoline starts trading at well under value to heating oil as the prior heating season begins but then outperforms heating oil throughout winter.

With the arrival of spring, it actually stalls for a while, but then it has usually made a final runup throughout the first month of summer. For example, the Long October Gasoline/Short October Heating Oil spread has closed more favorably toward gasoline on about July 21 than on about June 20 in 13 of the last 15 years --- suffering a daily closing drawdown greater than 1.60 cents/gallon in only 4 of those years. (Each 1.00 cent/gallon is worth $420.)

This year the spread began trading last October with gasoline at a discount to heating oil of about -23.00 cents/gallon --- near the middle of the range for the last decade or so. That discount then narrowed sharply, trading through even money and actually to a modest premium of 2.79 in January --- traditionally the coldest month of the year! It then retraced 60% of its rise as it pulled back into February to trade at a discount of -12.30. But then it made yet another run into April, reaching another albeit even more modest premium.

The spread has now returned to a discount and is actually testing the February extreme. In fact, it traded as wide as -10.70, narrowed to -8.62, and ended to week retesting -10.00. Will this area hold? If so, can it generate another run toward even money as the Fourth of July holidayopens up summer to cross country driving and weekend cruising?

Please remember: These are NOT trading recommendations. They are intended only as potential ideas based on the market's own performance in the past, but past performance is not necessarily indicative of future results. Futures trading involves substantial risk of loss.

If you have any questions or comments, call me at 541-484-7256 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Trade 'em

Jerry Toepke

PS Sign up for a Free 14-Day Trial into Jerry's Weekly Spread Commentary here:

Each weekly version selects two upcoming spread strategies, reviews their seasonal dynamics, provides current fundamental and technical perspective, and discusses their potential risk/reward and any relevant alternative trading ideas. A new Weekly Spread Commentary, along with access to the relevant historical data and charts updated daily on our website, is sent via e-mail each Friday.

Last Updated on Monday, 20 June 2016 10:05

Forex — Wild & Woolly!

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Forex — Wild & Woolly!

'Tis the season — when the US dollar has tended to reach an interim peak in mid/late November before trending at best sideways but usually lower through the end of the calendar — and tax! — year.  It being the world’s reserve, other currencies thus tend to rally through December.  But they do so at their own respective paces.  Who’s hot — and who’s not?Read More

Consider the Australian (A$) and Canadian (C$) dollars.  The Australian fiscal year runs July-June; the Canadian, April-March.  The two countries and their economies are similar, but their seasons and hemispheres are opposite.  Furthermore, one country exports to the world’s largest economy and the other to the world’s largest emerging economy.  Thus, their currencies are closely related but also pulled in different directions at different times of the year — ideal for seasonal spreads.

The seasonal pattern for the A$ illustrates how it has tended to behave in the Southern Hemisphere’s spring and early summer.  It rises (against the US$) from mid/late November into early December, pulls back into mid December, and then runs higher into early/mid January.  In fact, MRCI has found that March Australian Dollars have closed higher on about January 13 than on about November 12 in 14 of the last 15 years.

In contrast, the seasonal pattern for the C$ suggests it has tended to bounce modestly from mid/late November into early December before trending at best sideways but more typically lower into early January and a frozen Canadian winter.  The net effect has been for the A$ to regularly outperform C$ from late November into early/mid January.  For example, the Long March Australian/Short March Canadian Dollars spread has closed more favorably toward A$ on about January 10 than on about November 25 in 14 of the last 15 years — in only 4 of which suffering any daily closing drawdown greater than 0.98.  (The minimum increment of 0.0001 for both CME futures is worth US$10.00.  Brokers accept nominal spread orders.)

For the last four years, these two currencies have fluctuated from A$ at a premium to C$ of +7.26 to A$ at a discount of -8.23.  This year’s spread traded with A$ at a premium of a little more than +1.00 several times into early September before falling by late September to a discount of as much as -3.12.  The spread then retraced about 50% of its loss, narrowing its discount back to -0.88.  Since then it has widened again back toward the September extreme, closing the week within about 0.50 from it.

How much of an effect will China’s efforts to stimulate its own economy have on the A$?  Enough to reinforce normal seasonal influences on its tendency to outperform the C$?  Will the September low at -3.12 hold?  The last minor rally failed at -1.26, a penetration of which might signal a normal seasonal trend is underway.

Now consider a relationship between the Eurocurrency and Japanese yen.  The fiscal year for the European Monetary Union runs January-December; that for Japan, April-March.  The euro, like the D-mark before it, has exhibited a tendency to establish an interim low (against the US$) in mid November and then run higher into mid December on its way into the new year.  In fact, MRCI has found that December Eurocurrency has closed higher on about December 12 than on about November 30 in 12 of its 15 years as a futures market.

In contrast, Japanese accounting methods consider the half fiscal year to be as important the whole.  In fact, Japanese multinationals typically repatriate yen going into the end of the first half fiscal year to dress up their balance sheets.  Thus has the yen tended to rise from April into a peak, established by no later than late November, and then to decline again into April.

The net effect has been for euro to outperform yen late in the calendar year.  One of the more reliable segments of that seasonal trend has been going into expiry of December futures.  For example, the Long December Eurocurrency/Short December Japanese Yen spread has closed more favorably toward the euro on about December 12 than on about November 29 in 14 of 15 years — albeit not without a few painful drawdowns.  (The minimum increment for both CME futures is worth US$12.50.  Thus, brokers accept nominal spread orders.)

This spread reached its all-time high in 2008 when the euro traded at a premium of +63.21 to yen.  But by 2012, it had fallen to a discount of -7.28.  The spread has been recovering with a vengeance since, reaching +42.71 last March.  But then it weakened again, trending in orderly fashion down to only +32.99 by October.

But then it reversed yet again.  By this past Thursday, in fact, it reached +40.73 and was poised to challenge its March high.  Overnight, however, the European Central Bank announced it was prepared to whatever was required to stimulate Europe’s economy, leading most analysts to believe a massive stimulus package was in the works.  As a result, the euro dropped hard and the spread backed off nearly 1.8o in the most significant correction of the current trend.

Will it need to correct further?  A 40% retracement would come in just below 38.00.  Notice how well this spread trends in daily, weekly, and monthly time frames.  Further note that Japan eagerly wants the yen lower, although Europe wants the euro lower, also.  Have the currency wars commenced?

Traders already in platinum/gold may wish to know that the Long 2 April Platinum/Short April Gold spread has closed more favorably toward platinum on about February 2 than on about November 27 for the last 18 consecutive years — albeit, again, not without drawdowns.  This past week the spread again tested even money and rallied sharply.

If you have not already done so, you are encouraged to visit spread charts.
(Both for future convenience and for reference to past Commentaries, you can bookmark the WSC Index.) Please remember: These are NOT trading recommendations. They are intended only as potential ideas based on the market's own performance in the past, but past performance is not necessarily indicative of future results. Futures trading involves substantial risk of loss.
If you have any questions or comments, call me at 541-484-7256 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Trade 'em

Jerry Toepke


The 1980 Silver Market High - long-term nearby monthly charts don't show the true picture!

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May 2011 Silver traded up to $49.82 overnight --- just below 1980's all-time high of $50.36 traded by January 1980, in delivery and thus reflecting cash prices.  Below are links to 1980 charts for January, March, May, and July Silver.  (The latter three were constrained by daily trading limits, which are no longer in effect.)  Expect the exchange to raise margin requirements SOON as $11,745 is a bit low for a $238,600 contract at 47.72.(only 4.9% - lots of leverage!)

Last Updated on Wednesday, 01 June 2011 08:57
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Got Gas

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The March 2004 issue of "Stocks, Futures & Options" magazine ( will include an article from Moore Research Center, Inc., discussing the seasonal tendencies of gasoline and natural gas during March-May.

Few industries are more basic than energy, and few changes are more dependable than those that follow from one season to the next. So, if change creates opportunity, has the vernal equinox generated opportunities in the energy sector? If so, of what consequence and with what degree of reliability?

Last Updated on Wednesday, 19 January 2011 07:07
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In 2005 Wheat was trading at a subdued $3.00/bushel. Three years later, the CBOT's soft red had more than quadrupled to $13.00 --- while hard red spring traded in Minneapolis soared to an astonishing $24.00! Now as winter wheat prepares to emerge and spring wheat will soon be planted, all three classes of wheat trade mostly between $4.50 and $5.00.

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