Mark Hulbert

Newsflash: It's going to be hot this summer

Commentary: But if oil prices go up, that isn't the reason why

[Corrects reference to Claude Rains' character in movie "Casablanca")

ANNANDALE, Va. (MarketWatch) -- One of my favorite quotations is from the character played by Claude Rains in the old movie classic, "Casablanca."

Playing the part of the chief inspector, Rains disingenuously announces that he is "shocked, shocked" upon discovering that gambling was going on in the establishment he already knew was a casino.

I am reminded of Rains' quote whenever I read the explanations that get concocted on days near Memorial Day when energy prices go up. All too often, these explanations refer to the busy summer driving season that will soon be upon us, or to the likelihood that the temperature during the summer is forecast to be hot.

You don't say!

Never mind that, when energy prices go up during the winter, we're told that the reason was that - in effect - it's cold outside. I wonder how anyone can truly be surprised that people drive a lot during the summer or that the temperature is hot.

To be sure, I have no doubt that certain gullible investors have such short-term memories that they truly are shocked that it's hot in the summer and cold in the winter. But I also have no doubt that, whenever these naïve investors make buy and sell decisions based on their sudden realizations, there will be no shortage of extremely smart and shrewd traders who will be more than happy to take the other side of their trades.

That's how efficient markets operate, after all. If traders knew that crude-oil prices were going to be higher at the end of the summer than today, for example, they'd buy oil today, pushing its price upward to whatever point that its expected return over the next several months is not worth the risk. The seasonal pattern would soon disappear.

That's the theory, at least. How closely does reality conform to that theory?

To find out, I contacted Ben Jacobsen, a finance professor at New Zealand's Massey University. Jacobsen has coauthored several academic studies that focus on seasonal patterns in the oil and stock markets, including "Striking Oil: Another Puzzle." See study

For starters, consider what Jacobsen found upon investigating the monthly patterns in oil's price over the three-decade period through 2003. Though some months showed higher average changes in oil's price than others, that in and of itself is not surprising. He said it is not clear that those differences are statistically significant.

But what if we torture the data into saying something anyway? It might appear from Jacobsen's data, for example, as though oil's price rises at an above-average rate during the summer. But that turns out to be a function of just August and September. During June and July, in contrast, oil's price on average doesn't rise at all.

So that theory is pretty much of a non-starter.

Similarly, it might appear as though oil performs particularly poorly during the winter months, on the grounds that oil's price over the three decades Jacobsen studied fell during the average October, November, and December. But this theory runs into difficulty in January, which sports one of the highest average gains of any month of the calendar.

Another test for seasonal patterns in oil's price is to investigate whether any relationship exists between it and the stock market. It certainly would make sense if there were, according to Jacobsen, since he has found in his research that the stock market tends to perform poorly following months in which oil has shot up, and vice versa.

But, once again, Jacobsen was unable to find evidence of such a relationship. Consider the strongest seasonal pattern in the stock market, which is the one known as "Sell in May and Go Away," according to which stocks on average perform better between Halloween and May Day than they do the other six months of the year. Try as he might, Jacobsen was unable to find any statistically significant way in which oil's price could help explain this seasonal pattern in the stock market.

The bottom line? The U.S. consumer will do a whole lot of driving this summer, and the temperature will be hot. But if oil's price rises between now and Labor Day, it will be for other reasons.