By Jodie Gunzberg, head of commodities indices at S&P Dow Jones Indices.
Brent and WTI crude oil together contributed 3.4% to the 4.6% gain on the S&P GSCI in July.
The S&P GSCI Energy Total Return Index gained 8.1% in July, the most for a July in 13 years, led by petroleum that was up 9.2%. Finally the fundamentals may be showing the oil market is starting to rebalance with the rest of the commodities. The S&P GSCI Total Return Index had its best month this year, gaining 4.6% and lessening its year-to-date loss to -6.1%, while the Dow Jones Commodity Index gained 3.5% for a year-to-date loss of -2.1%.
Three of five sectors were positive that included both industrial metals and precious metals along with best performer, energy. Also two-thirds or 16 of 24 commodities were positive for the month, the most since September 2016, led by unleaded gasoline that was up 12.4%, its best month since April 2015 and hottest July since 2005. Other top performers were heating oil, gasoil and coffee, with total returns up 12.2%, 11.8% and 10.9%, respectively. The biggest losing single was the S&P GSCI Kansas Wheat Index with a total return of -10.3% for July, its worst month in two years since July 2015.
Source: S&P DJI.
Given Brent and WTI crude oil together have just over 40% weight in the S&P GSCI, they contributed heavily, 3.4%, to the 4.6% gain in July. Although according to the International Energy Agency (IEA,) OPEC compliance fell to just 78% in June, they are hoping to improve compliance by capping Nigerian production. However, the cuts may already be impacting the market as about 1 million barrels per day have been removed in addition to further cuts from non-OPEC countries. Also, a key factor in the oil price rebound is US production may be starting to slow as companies reach drilling capacity and fear the risk of another drop in oil prices. This may happen just as Saudi Arabia cuts oil exports to the US, potentially accelerating the inventory reduction.
One possibly bullish sign is the S&P GSCI Enhanced Crude Oil Index signalled it is time to hold the near contract rather than the later dated one. Today the enhanced index will start its five day rolling period to roll out of the December 2018 contract and into the October 2017 contract. This is the first time the index will hold the near contract since November 2014. The rule in the methodology that determines the contract says, “it will hold the near contract if the contango is not more than 0.50%.”
In July, the roll return, as measured by the excess return less the spot return, was -0.45% for crude oil. The negative roll return still reflects contango, a losing condition where near contracts are cheaper than later-dated ones, mainly resulting from excess inventories with high storage costs. While the contango is still present, it is the least since December 2014, when the crude oil roll return measured -0.23%. The S&P GSCI Crude Oil Spot Return Index year-to date through July was -6.6%, but the total rolling loss (year-to-date through July) subtracted an additional 5.6% from index positions in the most liquid nearby contracts, dropping the S&P GSCI Crude Oil Excess Return Index to -12.2% in 2017. This is far less than the negative impact in the first seven months of 2015 and 2016 when the roll costs were -12.7% and -20.8%.
Source: S&P DJI.