Crude oil is not likely to go back to $20 per barrel and if it did, it would not be in a straight line. As you can see in the chart below, the NYSE Arca Oil Index (XOI) of oil producing companies has very closely tracked its seasonal pattern this year peaking in June then falling to a mid-October low. The magnitude of this decline leaves plenty of upside potential even if the index fails to exceed this year’s high next year. Should XOI continue to track it seasonal patterns closely, a bottom is likely sometime later this year or earlier next year.
Oil companies typically come into favor in mid-December and remain so until the beginning of July (yellow box in chart above). This trade has averaged 12.4%, 12.3%, and 3.5% gains over the last 15-, 10-, and 5-year periods, This seasonality is not based upon the commodity itself; rather it is based upon XOI. This price-weighted index is composed of thirteen of the largest integrated oil and gas producers. Last year’s trades based upon this seasonality produced an average 13.6% gain. With this in mind, we will look to add the following ETF to the portfolio on a dip.
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