Rogers International Commodity Index® (“RICI”) methodology avoids negative Oil Prices!

 

Rogers International Commodity Index® methodology was designed such that it holds no futures contracts during their month of expiration. Thus, the May West Texas Intermediate (“WTI”) crude oil contract was not included in the RICI® on April 20th when prices for WTI went negative for the first time in history. The RICI® methodology rolled out of the May contract at the end of March (since the May contract expires in late April).

In addition, the RICI® holds approximately 46% of its total oil exposure in Brent Crude which is a cash settled futures contract. The Brent contract is not subject to the same potential pressures that can occur with the WTI contract which is deliverable. For example, in April when prices went negative, holders of the WTI contract may have been forced to sell at any price either due to their inability to take possession and/or the lack of storage space available.

The rules and methodology of the RICI® are available in the handbook which can be found at the following link: The RICI® Handbook 2020.

Given the unprecedented trading in the WTI contract and the historical volatility, the Committee which governs the RICI® held 2 emergency meetings by teleconference. On April 21st the Committee made the following announcement in a step to further mitigate the risk inherent in the significant increase in volatility in the near term WTI futures contract: RICI® Committee announces Extraordinary Roll

On April 28th the committee released RICI® Committee announces Role modification.

A Global Demand-Based Portfolio

The RICI® is a composite, US dollar-based, total return index methodology. It represents the value of a basket of commodities consumed in the global economy, ranging from Agricultural to Energy and Metal products. The Index’s weights attempt to balance consumption patterns worldwide (in developed and developing countries) and specific contract liquidity. The value of this basket is tracked via futures contracts on 38 different exchange-traded physical commodities, quoted in four different currencies, listed on nine exchanges in four countries.

 

DISCLAIMER: The index returns shown above do not represent the results of actual trading of investible products, assets or securities. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available only through investable instruments based on that index and there can be no assurance that investment products based on the index will provide returns that are similar to the actual index performance or provide positive investment returns. All the indices referred to in this presentation above are not investable products and their returns do not reflect the fees and charges inherent in investing in a vehicle designed to replicate a particular index. Any index performance provided is for illustrative purposes only. The time period selected represents the inception date of the Rogers International Commodity Index® and is intended to provide a historical long-term average. Data provided by Bloomberg LP, BarclayMAP, and RBC Wealth Management. Past performance is not indicative of future performance.
Alan Konn

Partner & Managing Director of Price Asset Management