Energy Commodity Prices Tumble in 2018 4th Quarter

After increasing 25% from January through the beginning of October 2018, the spot energy sub-index in the S&P Goldman Sachs Commodity Index (GSCI) ended the year 21% lower than at the beginning of the year, reports the Energy Information Administration (EIA). The S&P GSCI is a weighted average of commodity prices intended to reflect global commodity production quantities and futures contract trading volumes. Although all components of the S&P GSCI declined in 2018, the energy sub-index fell more than any other.

West Texas Intermediate (WTI) and Brent, two major crude oil benchmarks, account for 71% of the weighting in the S&P GSCI energy index. As a result, it tends to follow the major price movements in the crude oil market. The weights associated with individual commodities within the S&P GSCI are updated every year in response to changes in global commodity production quantities and futures con- tract trading volumes.

Crude oil prices had been rising since prices fell under $30/bbl in early 2016. For most of 2018, oil prices rose because of the increased potential for supply constraints and declining global petroleum inventories. When the U.S. announced its decision to reinstitute sanctions against Iran, several major oil- importing countries began decreasing the amount of Iranian crude they imported.

Brent crude oil reached a four-year high of $86/bbl on Oct. 3, 2018. However, several factors contributed to the subsequent sharp fall in oil prices. Production in the U.S., Russia, and Saudi Arabia increased to at, or near, record highs. Concerns about slowing global economic growth and its impact on oil demand also contributed to recent declines in prices. Waivers granted to certain countries that import Iranian crude oil also helped to ease concerns about oil availability in the near term. Crude oil prices ended 2018 lower than where they started at the beginning of the year for the first time since 2015.

(SOURCE: The Weekly Propane Newsletter, January 21, 2019)

Petroleum-based products such as reformulated gasoline blend stock for oxygenate blending (RBOB), ultralow-sulfur diesel (ULSD), and gasoil together accounted for 22% of the S&P GSCI energy index last year. RBOB had the largest price decline among the energy commodities because gasoline inventories have been relatively high and gasoline consumption has been relatively flat or declining. RBOB prices fell to lower than the price of Brent crude oil in November 2018 for the first time since 2011. ULSD and gasoil prices, on the other hand, did not fall as much because of increased consumption and low inventories of those fuels.

Natural gas accounted for the remaining 7% of the S&P GSCI energy index. The fuel had the shallowest price decline among all the energy commodities in last year. For much of 2018, natural gas prices remained relatively low and stable because of continued U.S. production growth. However, with U.S. temperatures falling in November to the lowest in four years that month, and natural gas inventories reaching relatively low levels, prices rose sharply between November and early December. Natural gas prices subsequently fell toward the end of December and ended the year slightly lower than where they started in 2018.