Can Energy Keep Carrying Commodities?

Ian Culley
May 30, 2022

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

Not all indexes are created equal… But, some are equal-weighted.

We like to use the equal-weight versions as they level the playing field among components and give us a more accurate view of the participation within a given universe.

This balanced approach adds a crucial layer to our analysis. 

Friday, we highlighted our custom commodity index which assigns the same weighting to thirty-three individual contracts. As we would expect, it’s moving in lockstep with the 10-yr breakeven inflation rate. Both are rolling over in the near term.

Interestingly, the energy-heavy CRB index is not following the same path. It's trading at new highs.

Which one should we trust?

Here is an overlay chart of the CRB index and our equal-weight commodity index:

The CRB is printing fresh 9-year highs as the equal-weight index is at multi-month lows. The divergence between these indexes speaks to the CRB’s heavy weighting toward energy. 

Energy dominates the CRB Index with a 39% weighting. In our equal-weight index, it only represents 15%. The largest group is industrial metals which account for just under a quarter of the weighting.

Due to the recent bifurcation between procyclical commodity groups -- mainly energy and metals, these indexes are moving in opposite directions right now. 

As such, when we overlay our equal-weight energy index ex-ethanol with our equal-weight base metals index, it paints the same picture:

Unlike the energy index -- which is making new highs, base metals look similar to breakevens and the broader commodity market. They have pulled back considerably in recent months.

What this analysis really tells us is energy is the outlier. The rest of the commodity complex is not confirming the relentless strength from crude oil and peers.

This concentrated strength highlights commodities' deteriorating participation beneath the surface and speaks to the corrective action that's been taking place.

Over the past few months, many base and industrial metals contracts have corrected through price. Meanwhile, energy has mainly corrected through time. 

So, was that it? Are metals and other groups done correcting and ready to catch higher to energy and other leaders? Or, will energy finally falter?

While we're not seeing any signs of energy slowing down, we do know that the strongest uptrends are supported by broad participation. At the moment, commodities lack this.

The structural trends remain intact, so we think this sideways chop will eventually sort itself out and strength will broaden out again. But until then, weak internals suggest corrective action is likely to continue. 

And it will most likely include even the strongest group – energy.

If and when the uptrend resumes in commodities, we’re looking to crude oil and friends to lead the way higher.

But for now, our equal-equal weight index captures the reality for most commodity contracts, and that is sideways. We think that remains the case.

Thanks for reading!

Let us know what you think.

Allstarcharts Team

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