I took a look at historical “local” peaks for nearby NYMEX crude oil futures prices and for XLE prices over the last ten-plus years. I found evidence that, in fact, XLE peaks did usually pre-date peaks in crude oil futures prices.

It appears that “local” peaks in XLE tend to predate peaks in crude oil prices. One hypothesis is that crude futures prices are subject to more speculation by traders, whereas stock market prices are primarily driven by more rationale, long-term investors.

The history of each price series proves that crude futures prices are much more volatile. The standard deviation of daily prices is 32% higher than for XLE. Also, the maximum drawdown from peak for crude futures prices is 82%, much higher than the 57% drawdown for XLE, although that too is large.

The history suggests that XLE peaks often pre-date peaks in crude futures prices, and so the December peak in XLE may be signaling a peak in crude prices for this cycle. However, what is not known is whether the peak in December is truly the “local” peak, or if XLE prices will rise yet further. The fact that XLE is 8% lower than its peak in December is significant though.

Interesting article on oil seasonality.

This can be predicted with some certainty because of the seasonal demand patterns for the commodity. Global demand for oil peaks in the summer driving season in the Northern Hemisphere. The market starts to anticipate the supply/demand dynamic shifting in favor of the demand side by the end of February. By June, the market will have fully priced this in, unless demand is higher than usual and/or supply less than anticipated. In that case, the rally can go on until September.

(…) since the beginning of the oil era in the mid-1800s, there has been an inexorable increase in oil use that has remained intransigent to even the most negative economic conditions and factors. Supply, on the other hand, tends to increase in big spurts and then plateau for periods of time.

A deficit of supply versus demand also is not just a short-term issue. It is likely to continue for a few years. Current oil production is increasingly dependent on aging fields (Saudi Arabia’s giant Ghawar field, the largest in the world, has been in production for approximately 65 years – old for a human being, ancient for an oil field). To maintain production under such circumstances requires greater and greater capital investment. During the last few years, however, there has been approximately a $1 trillion deficit in expenditures needed to maintain oil output. Until these funds are restored, production will be hampered.