Weather fluctuations are normal. And while most of us could use a break from the hot days of the summer or extremely cold days of the winter, future energy traders may not. As these fluctuations tend to affect how much energy is produced, delivered and consumed.

The process where the value of an asset fluctuates depending on the time of the year, is called seasonality. And while it may not be easy to determine the effects of its impact accurately, still traders and investors should take account of this future market occurrence especially when it comes to energy.

Your heating or cooling equipment will run longer and at maximum capacity when the temperatures soar or drop. And you may end up paying high electricity bills. But as an investor in the energy sector, whether you are a short term crude speculator or have deeply invested in implementing weather strategies, it is best that you are aware of these fluctuations and how you can mitigate them so that you don’t get affected.

Seasonal Patterns for Different Energy Types

There are a number of things which could influence the value of energy in a market. Future marketers use these factors to determine the market price of energy. They are always interested in the value of energy in the near future. Even if the commodity is selling at a high price and the business is booming today, that will not stop them from analyzing the energy trends for tomorrow. That is where seasonality becomes useful. It helps traders to project the future supply and demand levels and use them to determine the price today.

Here is how the leading unrefined energy future contracts tend to fluctuate.

• Henry Hub Natural Gas
The demand for this gas tend to peak on cold weather mostly during the fall and the beginning of the winter months. Smart traders will watch for big cold fronts forming in the artic that will work their way down to the states, causing a spike in demand and prices.
• West Texas Intermediate (WTI) Crude Oil
There isn’t a big difference with the pricing of this product within the different seasons. But appreciation and depreciation are felt during the North American spring/summer and fall/winter respectively. Also, there tends to be a high demand for refined fuel products in most cities during the beginning of Memorial Day and the end of Labor Day, the price of WTI tends to fall at such times.
• RBOB Gasoline
RBOB and WTI are both products of crude oil, so their pricing is almost the same. There is a high demand for gasoline during the summer than it is during the winter. Also, holidays such as Christmas and Thanksgiving tend to be a big boost to RBOB’s demand.
• NY Harbor Heating Oil

During spring and summer, there is a decreased demand for heating oil as compared to during cold winter weather which is the peak for this commodity.

Note that the prices of WTI and Henry Hub may not rely so much on seasonality. But the tendencies are accurate, to the point that future traders engage other alternative products designed for weather trading to survive during the fall season.

Is Weather a Risky Business For Energy Markets?

According to statistics, nearly 20% of the U.S. economy is affected by the weather. For instance, agriculture and energy depend completely on the temperatures. A rise or fall in temperature affects the energy levels, and the farming produces.

But businesses face unique challenges caused by weather fluctuations. Often, the changes in the climate will affect the volume and uses of the product and not the price. For instance, during unexceptionally cold summers, hotels and air seats may be left empty. And on the other hand, during a warm winter, people will not need so much heat which means companies will not make great sales. But even though the energy prices may change depending on the high or low demand, it will not cover up for the lost revenues that are as a result of fluctuating temperatures.

Weather challenges are also localized and are impossible to be controlled. Even with the metrological science advancing, it is still difficult to accurately and consistently predict weather changes.

What If a Trader Has Weather Insurance?

Futures traders have been and still are using insurance to protect themselves from the ever-changing weather conditions. But unfortunately, while it is an excellent way to cover yourself, these insurances only protect traders from catastrophic damages. And do not include reduced demand for the business as part of the cover. Nevertheless, having an insurance cover will give you an upper hand during the high-risk and low probability events.

What are the CME Weather Futures and Options on Futures?

Chicago Mercantile Exchange (CME) introduced weather futures in 1999. The aim was to create an open platform for traders to negotiate prices and complete price transparency. CME weather futures and options on futures use specific indexes to represent monthly and average seasonal temperatures of 15 U.S. and 5 European cities. Companies in energy-related business benefit a lot from the weather futures. But it is believed that agricultural and restaurants companies involved in tourism might sign in for this contract as well.

Final Thoughts

Determining the impact caused by seasonality may be difficult, but it is essential for investors particularly those dealing with energy products, to understand the calendar and how it affects the price. With this understanding, traders will be able to spot opportunities in the energy markets to capitalize on.