Global Crude Index Overview
Version 1.2
June 2020

1.     Introduction
In response to structural differences in the global patterns of trade as well as the changing fundamentals in crude production caused by the shale revolution, General Index has developed a new crude index (GCX) to better reflect market conditions and the shifting roles played by the three major benchmarks in the producing areas of the world.  

The main tradeable benchmarks accessible to physical, futures and derivative players are Brent, WTI and Oman via their respective liquid futures contracts.  These three instruments drive flat price globally and their interplay determines, via differentials, how the oil is traded and shipped globally.  

The GCX index reflects the respective production volumes of these benchmarks and the impact their output has on the associated contractual linkages.

The relationship of the three main contracts is dynamic and reflects not only changes in demand but deep significant shifts in policies and in production technologies. In recent years the most dramatic change has been the rise in US production aided by the shale revolution. The US is now the largest energy producer in the world and is also a major exporter of crude and products. Its futures contract plays an oversize role in the Americas and starts to become the basis of trade in some exports to Asia and Europe as well. Brent futures has been the mainstay benchmark and is extremely important in setting the flat price tone aided by being based on an FOB North Sea physical contract, while the Oman futures contract sets the tone in the Middle East and Asia.

GX has estimated the impact of these contracts based on oil production figures published by the International Energy Agency and set a percentage allocated to each contract. GX reviews these allocations annually and modifies the allocations after a period of notice. This re-weighting ensures the GX crude series is representative of global trade.

1.1.       The need for a new global benchmark 
GX has been observing the issues caused by over-reliance in a single benchmark as well as the volatility and unexpected results seen in times of stress near the expiration of the contracts. Recent examples include physical backwardation in Brent at times of global surplus or negative values at Cushing due to its geography. Those challenges are inherent but become further magnified when the market suddenly changes.

The weaknesses of existing benchmarks - both futures and physical - have been laid bare during the early months of 2020, with wild swings from positive to negative and back again over just a few days. The prices published were not accurate reflections of market value over this period - but instead were the result of operating parameters of specific contracts and price-assessments, and mismatches between futures and physical methodologies.

General Index is offering the GCX series to provide solutions to the problems exposed by the pressures in sudden demand or supply problems as seen in early 2020 due to Covid-19.

 2.    How it works

2.1.       Description
The Global Crude Index is a transactable benchmark representing the tradeable value of underlying futures in three major supply locations, the Middle East, North Sea and the US. The Index is a basket of the tradeable value of three major futures contracts, Oman, Brent and WTI.  

The GCX index combines the three contracts to reflect the flat price of crude oil globally - thereby providing an index that is genuinely in step with supply and demand conditions. Through the three-way contract mix, an abnormal condition in one contract is subsumed by the other two benchmarks to ensure that global market structures are adequately represented. Moreover, the GCX series cuts off a two-day period prior to the expiration of the Brent and WTI contracts and a five-day period prior to the expiration of Oman – providing additional security against the volatility that can be seen as contracts expire. 

The early rolls in the GCX series ensures that problems caused by temporal or regional negative pricing or by sudden surges in price are either eliminated or minimized. The blended nature of a global benchmark, therefore, provides a better representation of global conditions. 

The graph below reflects the price of GCX from January 2020 at a time of highest market stress since the 1970s.     

 3.    Key Technical Details 
Full technical details are described in the latest version of the Index Factsheet.

 3.1.       GCX Component Rolls
GCX is composed of global indicators providing the geographical coverage of the index. Three futures contracts provide the value underpinning of the Index: CME Light CrudeOil, CME Brent and DME Oman. The contracts have different expirations: CME LCO is five day prior to the 25th of the month; CME Brent and DME Oman expire at the close of the month.   

GCX contracts roll ahead of the underlying futures in order to avoid, or at least minimise, disturbances caused by the expirations; most notably seen on April 20, 2020 when the front month CME contract plunged to a negative value as low as minus $40.00/bbl.  

3.2.       Weighting of the Components
The futures contracts underpinning the Index are weighed in a manner that represent the role they play in international and their domestic markets.  Historically, Brent has been the dominant indicator of crude value globally but has seen its role diminish as US influence has increased.  The LCO - the primary indicator for the Americas - is playing an increasingly important role across the world as rising volumes of US crude are exported to other jurisdictions.  Meanwhile, the production of the Middle East is increasingly tied into Oman as traded on the DME.

For purposes of the Global Crude Index, production of crude oil (and naturally excluding refinery gains) has been accounted for and separated into three classes:
·       Americas crude production and other region/countries depending on CME LCO benchmarks,
·       European and other regions depending on Brent benchmarks,
·       Middle East production and other regions dependent on Middle east benchmarks.  

Crude production is based on the average for the last three months of the year from the International Energy Agency global report. These weightings are reviewed following publication of updated production data and are applied from April 1st. In the event that the data is released late, updated weightings will apply from the beginning of the first possible month after publication (likely to be May) and apply up to the normal cut off of March 31st of the following year.

3.3.       Time valuation methods
The underlying values of the components shall be determined by GX based on the value of the last trade prior to the assessment time. In the event that a single product was not traded in the prior minute, an assessed value is produced based on the value relative to the other products when both were last traded. In the event that there are no trades or a paucity of trades, GX determines the relevant value based on its expertise and knowledge of markets. GX could base its determination, but not solely, on bids and offers in futures markets, relational values in other futures indicators and/of bids and offers in related markets.

3.4.       Expiration Date
The contract is an evergreen instrument published daily and reflects the continuous trading value of key global crude commodities and the GCX series has no expiration date. While the GCX instrument, due to its evergreen nature, has no termination date; GCX should be seen as having inherent monthly components leading to the GCX having publication attributes from the first of the month to the end of month which then lead to values in January, February, March and so on.  

3.5.       Physical delivery
The futures contracts are deliverable according to the specific rules of the exchanges underpinning the trading of the contracts.  

The contracts underpinning the GCX index have, if necessary, physical delivery. Chiefly, CME WTI and DME Oman have routinely physical delivery. The GCX, however, has no delivery and it is afinancial instrument which reflects the value of the contracts.

4.    Publication
The GCX is published GX and made available to its customers via direct feeds, emails or any other method suitable to the customer. The indexes will also be released through other electronic vendors.

The Index is displayed to 2.d.p. on the GX website and is published to 4.d.p via all other distribution mechanisms.

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