January 11, 2021 [Bloomberg] – Tens of billions of dollars worth of commodity investments are about to be switched around in a move that’s set to cause a wave of oil-futures buying.
While the move happens every year, crude’s 20% decline in 2020 means that the value of oil index investments has been far below its target for months. As a result, as much as $9 billion of oil contracts could be purchased over the five days of re-balancing that start Friday, according to Citigroup Inc., at a time when the market is already surged to 10-month highs.
The move affects the world’s two biggest commodities indexes — the S&P GSCI Index and the Bloomberg Commodities Index. Crude has recovered from its coronavirus-driven rout and so far this year has been benefiting from Saudi Arabia’s unilateral output cuts, a surge of investments to hedge reflation and coronavirus vaccines. Markets are now abuzz with talk of the next tailwind for prices: commodity indexes plowing into another 80 to 100 million barrels of crude futures contracts.
“It’s a big deal,” said Gary Ross, a veteran oil market watcher and chief executive officer of Black Gold Investors LLC. “If you start increasing financial length by 80-100 million barrels, you push up the price $2-$3, all other things being equal.”
Investment products that track the S&P GSCI or BCOM are followed by billions of dollars in passive, long-only funds such as pension funds. Bloomberg Index Services Limited, the administrator of Bloomberg Indices, including BCOM, is a wholly-owned subsidiary of Bloomberg LP.
Buying Trigger
Estimates of the exact size of the inflows vary significantly. That’s because the figures are based not only on a product’s weight within the index, but also their total assets under management and how actively traded they are. For BCOM, the weight of most contracts will increase, except Brent and Nymex gasoline. For S&P GSCI, oil contracts will see a lower weighting, despite WTI remaining the largest constituent part.
What matters, though, is investment flows. While weightings might drop, the dollar value to maintain the new weightings might need to rise. And that’s what would trigger the contract buying.
Citi’s estimate assumes that BCOM and S&P GSCI both have about $100 billion of investments. Still, JPMorgan Chase & Co. said last month that it only expects about $3 billion worth of buying in the market as crude’s rally up toward $50 limited some of the additional purchases required.
There are some big unknowns about exactly how the process will play out. One is that investors and traders, aware of the re-weighting, may already have been pre-empting it. Another is the total dollar value of the commodity assets that funds will have under management, which will dictate the scale of investment flows.
RBC Capital Markets estimates that there will be about 80,000 Brent and West Texas Intermediate contracts bought during the re-balancing.
“This buying pressure across the complex should serve as a tailwind and help fortify the improving oil market sentiment,” RBC analysts Helima Croft and Michael Tran wrote in a note.
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