Release date: January 27, 2021 | Next release date: February 3, 2021
Energy prices have increased more than non-energy commodity prices since the fourth quarter of 2020
Energy prices have increased more than non-energy commodity prices on a percentage basis since October 2020. The energy portion of the S&P Goldman Sachs Commodity Index (GSCI) increased 26% from the beginning of trading on October 1, 2020, to January 26, 2021. In comparison, the non-energy portion of the GSCI—which includes industrial metals, precious metals, agricultural commodities, and livestock—increased 14% during the same period (Figure 1). Members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) announced modest production increases in December that were offset by larger announced production cuts from Saudi Arabia in January that contributed to upward price pressure on the energy portion of the GSCI. While the value of energy commodities increased more than non-energy during this period, energy and non-energy commodities are exhibiting increasingly positive correlation in their daily price changes, likely reflecting higher economic growth expectations among market participants as a significant price driver for energy and non-energy commodities.
What is the S&P GSCI?
The S&P GSCI is an index comprising 24 individual weighted commodity contracts that represent the prices of a broad spectrum of commodities and is used as a benchmark for changes in commodity markets overtime. The GSCI is organized into 5 subindexes (energy, agriculture, livestock, precious metals and industrial metals), with the value of each subindex subject to the weight of the commodities within it. The weight assigned to each commodity reflects its significance to the world economy and is calculated as a function of the commodity’s global production volume (after necessary conversions made for the purposes of calculation) over a five-year period and the commodity’s financial market liquidity, measured by the total quantity of a commodity traded compared to the number of outstanding contracts on that commodity. Crude oil contracts for Brent crude oil and West Texas Intermediate (WTI) crude have the two highest commodity weights, and together account for more than 40% of the GSCI based upon their weightings. The energy sub-index is also weighted most heavily toward crude oil and petroleum product prices, which account for 95% of the subindex’s value, and natural gas prices accounts for the remaining weight (5%). Price levels for the GSCI were first published in 1991 and a related futures contract is currently traded on the Chicago Mercantile Exchange (CME).
News of successful COVID-19 vaccine trials and the beginning of vaccine distribution helped to bolster economic growth expectations across multiple sectors of the economy beginning in November 2020. Because demand for commodities can be highly sensitive to changes in economic growth, higher economic growth expectations have contributed to higher prices for most commodities. Increasing correlations between energy commodities and non-energy commodities suggest that these price increases may be increasing together due to expectations of a strengthening economy. As of January 26, the energy portion of the GSCI had a positive 60-day rolling correlation of 0.32 with agriculture, 0.29 with livestock, and 0.20 with industrial metals (Figure 2). The agriculture and livestock correlations increased gradually throughout the fourth quarter and into 2021, starting the fourth quarter at 0.22 and -0.06, respectively. Energy and industrial metals entered the fourth quarter with a strong correlation of about 0.35 before falling to less than 0.10 in early December and increasing steadily since then. While the higher value of the energy subindex relative to non-energy commodity subindexes reflects the sector-specific impact of the OPEC+ production announcements, the high correlations between energy and other commodities suggest that macroeconomic demand expectations also play an important role in energy’s price growth.
In contrast to the other GSCI commodities that all showed positive correlations and higher prices, prices for precious metals remained relatively flat through the fourth quarter and exhibited a negative correlation with the GSCI energy subindex. The rolling 60-day correlation between energy and precious metals became negative in November and was -0.39 as of January 26.
Although market expectations for rising demand are reflected in increasing commodity prices across multiple sectors of the GSCI, energy commodities have seen the largest percentage increases in prices since the beginning of the fourth quarter of 2020 because of supply developments unique to the energy market. In December, OPEC+ announced that it would gradually increase crude oil production, beginning with an increase of 0.5 million barrels per day (b/d) in January 2021 and then further increases as needed but not to exceed 0.5 million b/d in a given month. Before that meeting, OPEC+ had initially scheduled an increase in production by as much as 2.0 million b/d. Following this announcement, Saudi Arabia announced in early January that it would voluntarily cut production by an additional 1.0 million b/d during February and March, resulting in net lower-than-expected overall OPEC+ production in early 2021.
The relatively high percentage increase in energy prices also reflects a change in course from the energy sector’s particularly low prices through most of the first three quarters of 2020, when the energy subindex had the lowest relative value within the GSCI. Low energy sector prices during this time were characterized by low global demand, especially for travel, and low energy sector correlations that reflected the uneven pace of the economic recovery across differing sectors of the global economy.
In the first quarter of 2020, the GSCI decreased 43%; the energy component decreased 61%, and all other sectors aside from precious metals also decreased. Most of the decrease occurred between March 3 and March 18, when responses to the COVID-19 pandemic intensified, including the presidential declaration of a national emergency on March 13. During that period, the GSCI decreased from $201 to $134, 44% lower than the beginning of trading on the first day of 2020. The energy component of the GSCI had high correlation with the other GSCI sectors in the first quarter, a trend that is characteristic of demand-driven price declines and economic contraction. Energy shared a correlation coefficient of 0.54 with agriculture and with livestock, 0.49 with industrial metals, and 0.24 with precious metals. All of these correlations were quarterly highs for the year.
The GSCI increased 14% in the second quarter of 2020. Energy and industrial metals contributed the most to this increase. Energy commodities reached a low early in the second quarter of 2020, down 74% year-to-date on April 21, the day after WTI crude oil futures prices fell to lower than zero. From this April 21 low, the energy subindex of the GSCI nearly doubled in value by the end of the quarter on June 30. The relative increase was the result of some demand recovery and OPEC production cuts of more than 10.0 million b/d. Meanwhile, the industrial metals subindex increased after China’s infrastructure spending contributed to increased copper demand.
Trends from the latter half of the second quarter of 2020 largely continued in the third quarter, although an uneven pace of recovery saw energy prices remain relatively flat while other commodities surpassed their January 1 levels late in the quarter because of continued increases in demand, particularly from China.
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price increased more than 1 cent to $2.39 per gallon on January 25, 11 cents lower than the same time last year. The East Coast, West Coast, and Rocky Mountain prices each increased more than 2 cents to $2.37 per gallon, $2.93 per gallon, and $2.26 per gallon, respectively. The Midwest price was unchanged at $2.28 per gallon, and the Gulf Coast price decreased 1 cent to $2.10 per gallon.
The U.S. average diesel fuel price increased 2 cents to $2.72 per gallon on January 25, 29 cents lower than a year ago. The Midwest, Gulf Coast, and West Coast prices each increased more than 2 cents to $2.66 per gallon, $2.48 per gallon, and $3.18 per gallon, respectively, the East Coast price increased nearly 2 cents to $2.76 per gallon, and the Rocky Mountain price increased 1 cent to $2.61 per gallon.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 2.2 million barrels last week to 57.6 million barrels as of January 22, 2021, 5.5 million barrels (8.7%) less than the five-year (2016-2020) average inventory levels for this same time of year. Midwest, Gulf Coast, and Rocky Mountain/West Coast inventories decreased by 1.5 million barrels, 0.8 million barrels, and 0.4 million barrels. East Coast inventories increased by 0.6 million barrels.
Residential heating fuel prices increase
As of January 25, 2021, residential heating oil prices averaged almost $2.58 per gallon, nearly 2 cents per gallon higher than last week’s price but more than 42 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged almost $1.69 per gallon, nearly 2 cents per gallon below last week’s price and almost 15 cents per gallon below last year’s price.
Residential propane prices averaged nearly $2.20 per gallon, more than 1 cent per gallon higher than last week’s price and more than 20 cents per gallon above last year’s price. Wholesale propane prices averaged more than $1.01 per gallon, 16 cents per gallon lower than last week’s price but more than 44 cents per gallon above last year’s price.
For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.
Retail prices (dollars per gallon)
| Retail prices | Change from last | ||
|---|---|---|---|
| 01/25/21 | Week | Year | |
| Gasoline | 2.392 | 0.013 | -0.114 |
| Diesel | 2.716 | 0.020 | -0.294 |
| Heating Oil | 2.575 | 0.017 | -0.421 |
| Propane | 2.196 | 0.013 | 0.202 |
Futures prices (dollars per gallon*)
| Futures prices | Change from last | ||
|---|---|---|---|
| 01/22/21 | Week | Year | |
| Crude oil | 52.27 | -0.09 | -1.92 |
| Gasoline | 1.549 | 0.021 | 0.034 |
| Heating oil | 1.576 | -0.017 | -0.158 |
| *Note: Crude oil price in dollars per barrel. | |||
Stocks (million barrels)
| Stocks | Change from last | ||
|---|---|---|---|
| 01/22/21 | Week | Year | |
| Crude oil | 476.7 | -9.9 | 45.0 |
| Gasoline | 247.7 | 2.5 | -13.5 |
| Distillate | 162.8 | -0.8 | 18.1 |
| Propane | 57.610 | -2.207 | -19.626 |