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Q4 2017: Crude Oil Is Black Gold, With Some Nuances

by: S&P Dow Jones Indices

By Marya Alsati

As of Dec. 18, 2017, the S&P GSCI is up 4.6% for the quarter, driven by petroleum, which is up 9.9% and makes up more than 59% of the index.

So far in the quarter, the S&P GSCI Crude Oil is up 9.8%, and the S&P GSCI Brent Crude is up 12.7%. The difference in return is an indication of the level of availability of the commodity in the market. WTI crude, the benchmark for North America, is relatively underperforming Brent crude because of record-high levels in U.S. production. Meanwhile, Brent crude, the benchmark for crude oil production in Europe, Africa, and the Middle East, is being supported by OPEC's rebalancing efforts and the shutdown forced by repairs of the UK's most important pipelines.

While the spread between the two crudes has been widening since September 2017, it is important to note that it is not as wide as the spread reported at the end of 2016, when the S&P GSCI Crude Oil closed the year up 8.0% and the S&P GSCI Brent Crude closed up 28.5%.

In addition to the difference in returns, the two crudes are exhibiting different levels of backwardation and contango. Brent crude is in a state where its futures curve is sloping downward, generating a positive roll yield and an expectation that prices will rise, while WTI crude is in contango, with an upward sloping futures curve resulting in negative roll yield, along with an expectation that prices will fall.

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