Yesterday’s main event was the inauguration of the 46th US President, Joe Biden. The ceremony was a muted affair because of the unprecedented security measures that had to be taken after the siege of the Capitol two weeks ago and due to the notable absence of the outgoing President, Donald Trump. His successor wasted no time and got down to business shortly after the mandatory protocol was over. Joe Biden signed a series of executive orders, a step that was aimed to reverse several of its predecessor’s policies and mark the direction he is planning to lead the country over the next four years.

Mask wearing on federal property, halting the withdrawing of funds from the WHO, defunding the building of the wall on the Mexican border and ending the travel ban from Muslim countries have been high on his agenda. As for the oil market the President has revoked the presidential permit to build the 830,000 bpd Keystone XL pipeline that was planned to carry Canadian oil sand crude to Steele, Nebraska. Joe Biden has introduced a moratorium on oil and gas leasing in Alaska and he is also preparing to re-join the Paris Climate Agreement, signalling that his campaign promise to achieve net zero emission in the country by 2050 was more than just empty words.

And the market reaction? It was generally positive. Wall Street liked what it heard, and it is counting on the $1.9 trillion stimulus package announced earlier by the new administration. In a vote of confidence major stock indices settled at record highs sweeping aside concerns about rising infection rates and strict lockdown measures.

Oil was somewhat lagging the stock market performance although the major futures contracts still managed to finish the day in the black. The retreat from the day’s highs probably disappointed those with bullish inclinations and was possibly the result of some shedding of length ahead of the release of the weekly API report on US oil stocks. Those who liquidated were vindicated. Although the builds in product inventories were less than anticipated the unexpected increase in crude oil stocks triggered some post-settlement selling, the impact of which is still being felt this morning. (On a side note, due to yesterday’s inauguration the EIA will release its own findings on US inventories two days later than usual, tomorrow at 4 pm London time.) The negative reaction to the statistics is understandable but might not dent confidence for a prolonged period as reflected in the widening of the backwardation of the two main crude oil futures contracts.

Products might outperform crude oil

Last year was undoubtedly an année noire. The sole encouraging development regarding 2020 is that it is behind us. The devastating destruction caused by Covid-19 was felt in every walk of life – amongst others is the commodity and within that in the oil sector. Despite the impressive recovery from the troughs reached in April the five main crude oil futures contracts settled well below the 2019 closing levels and the annual average front-month prices were also well below that of the preceding year.

Consequently, those who invested in oil futures contracts were found licking their wounds by the end of 2020. As individual products all finished the year in the red so did different energy indices and ETFs. The S&P Goldman Sachs Commodity Index Total Return Energy Index lost 46%, whilst the energy sub-index of the Rogers International Commodity Index shed nearly 45% of its value. The Energy Select ETF fell 37% and you would have ended up with around $32 after every $100 you had invested into the US Oil Fund last year.

It is interesting but not surprising to note that refiners were suffering significantly during the pandemic. The 3-2-1 CME crack spread (3 units of WTI against 2 units of RBOB and 1 unit of Heating Oil) averaged $33.78/bbl in 2020, down from $55.29/bbl in 2019. It is a good reflection of how the world dealt with the catastrophic punch delivered by the coronavirus. Although annual consumption data by products is not readily available yet the latest estimates from the IEA are telling. In the developed part of the world demand in October 2020 for motor gasoline was down 1.6 mbpd year-on-year (-11%), jet and kerosene consumption fell 2.15 mbpd (-48%) and gasoil & diesel oil demand contracted 950,000 bpd or 7%.

The good news, however, is that the worst is most likely behind us. Mass vaccination programmes are under way and until economic and oil demand growth kicks in stimulus measures will be there to keep up the morale. Oil demand is on the rise (although this growth is currently being amended downwards), therefore refining margins should also improve. Under this scenario products ought to outperform crude oil and if this really proves to be the case energy indices that are in the position of tweaking their weighting could achieve better results than their peers, if not this year then next.

The weighting of individual components in an energy index is chiefly the function of liquidity and global consumption. Looking at the aforementioned two energy indices, the S&P Goldman Sachs Commodity Index Total Return Energy Index and the Rogers International Commodity Index – Energy there has been no significant re-balancing in 2021 from the previous year. In fact, the latter left its composition unchanged, according to data available from its website. The S&P GSCI index now puts slightly more weight on Gasoil and Heating, cuts the ratio of WTI and RBOB and leaves Brent broadly unchanged. Given the expected recovery in global oil demand and in refining margin those indices that increase the slices of products in the pie at the expense of crude oil – preferably more in the middle of the barrels as the growth in transportation (goods must move) might outpace the increase in road travel (home working could dent gasoline demand growth)- could achieve better results than their competitors.