No Oil Price Impact Seen From Index Change

November 14, 2012

S&P's GSCI increased its weighting in Brent oil futures, but that shouldn't impact oil prices, S&P Dow Jones' Jodie Gunzberg says.


[This article originally appeared on our sister site,]


Fears that the latest reweighting of the most widely tracked commodity index would cause an upheaval in the price of crude oil have been dismissed by market participants.

Recent press reports said that investors would be forced into a major asset allocation shift after S&P’s benchmark GSCI commodity index increased its weighting in Brent oil futures and decreased its holdings of the West Texas Intermediate futures contract.

According to a report from commodity exchange-traded product provider, ETF Securities, there has also been speculation that the index change might have a large impact on oil positioning, with particular interest in the spread between the Brent and WTI oil price contracts.

Earlier this month the Brent oil benchmark traded at a premium of nearly $23 a barrel to WTI, the US benchmark, and a significant divergence in prices between the two oil prices measures has opened up in the last two years.

This divergence has been blamed on several factors, including WTI being too heavily US-focused and therefore not representative of the global supply, dollar currency movements, and supply constraints at Cushing, Ohio, the price settlement point for WTI oil futures.

However, Jodie Gunzberg, head of commodity indices at S&P Dow Jones Indices, said: "We reweight the index to reflect what happened in the market during the year. Right now, Brent is trading at a premium to WTI and the weightings that will take effect in January 2013 reflect this. These result from the world production weight.”

She added: "Research shows that the index’s value does not impact the price of commodities so the reweighting won't change the price of Brent or WTI."

Around $80 billion is invested in products tracking the S&P GSCI family, according to Gunzberg.

“The change in the weightings represents a $3.5 billion move out of WTI and a$3 billion move into Brent. But Brent will make up 22.3% of the index, while WTI will be 24.7%, so Brent is still smaller than WTI and not even the biggest constituent in the GSCI index," she said.

ETF Securities calculates that a slightly larger shift may take place as a result of index changes, with total net buying of Brent crude contracts of around $5 billion, or 1.9 per cent of the average daily trading volume of the futures contracts. WTI futures may see around $4.5bn of selling, equivalent to around 1.8% of total average daily trading volumes.

Nicholas Brooks, head of research and investment strategy at ETF Securities, said: “The spreads are unlikely to widen because the changes that have been made, when taken in the context of trading volumes in the Brent and WTI futures markets, are such a small percentage. The changes are also smaller than the last rebalancing at the beginning of this year.”

A recent ETF Securities report provides evidence to back up the claim that commodity index changes have a limited impact on oil prices.

"The index rebalancing earlier this year supports this view. In January 2012, when the rebalancing impact was theoretically much larger (WTI selling equivalent to 5.1% of average daily trading volume and Brent buying of around 3.3% of average daily trading volume) there was no discernable impact on the Brent-WTI spread,” says the firm.


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