Products are the winners of index re-balancing

November is usually the time of the year when commodity indices are rebalanced for the following year. Perhaps the most important of these indices is the S&P Goldman Sachs Commodity Index. It is a world production-weighted commodity index that is composed of 24 exchange-traded futures contracts on physical commodities across five sectors: energy, industrial metals, precious metals, agricultural and livestock. For next year, energy will remain the largest sector weight. In its energy sub-index, the three major CME Group contracts will be the dominant segment with a 52% share of the total (or 55% when the CME Natural Gas futures contract is added).

The Contract Production Weights (CPWs) are based on a five-year average of global physical production together with the trading volume from September of the previous year to August of the current one. The chart above displays the historical weightings together with the re-balanced 2024 composition of the three major CME oil contracts – WTI, Heating Oil and RBOB. For the sake of better visualization, the weights of the product contracts are displayed on the left-hand axis and that of the U.S. crude oil benchmark on the right-hand side.

The most conspicuous development is the increasing relevance the products contracts will play next year. This is a welcome change for two reasons. Firstly, due to the recent health crisis and the rise in global geopolitical tension volatility rose considerably and this led to a relative increase in WTI trading volume against products in search for liquidity. The growing weight of products implies some kind of “normalization”. Secondly, statistical evidence shows that products, on balance, produce better returns than crude oil. The January 2012 through the November 2023 period saw Heating Oil and RBOB return 46% and 68%, respectively. Heavier emphasis on products might potentially lead to more attractive returns.

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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