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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Wednesday, October 20, 2021

Pair Trade - Long Gasoline & Short CMC Energy Index Basket

By Century Financial in Investment Insights

Pair Trade - Long Gasoline & Short CMC...
Pair Trade Flyer - Long Gasoline & Short CMC Energy Index Basket

* Trading in financial market carries risk and can result in loss of capital.
* This performance is only observed with historical backtests and not traded by the company.


The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.

Risks & Assumptions

Past performance is not indicative of and does not guarantee future results. Please read the complete disclaimer carefully.
Trading pairs is not a risk-free strategy. The difficulty comes when prices of the two commodities move contrary to the positions taken resulting in losses. Thus, it is important to adhere to strict risk management rules when dealing with such adverse situations.
Holding costs mentioned below are based on the ones currently available over the platform. Holding cost is subject to change impacting the trade either negatively or more positively.
Natural gas as a component of CMC Energy Index Basket has outperformed all the other commodities over the last 5 years period. Currently, Natural Gas has one of the lowest weightages in the basket and hence has not been able to contribute to any outsized gains for the CMC Energy Index Basket. Should the CMC Energy Index Basket composition change to reflect these gains, the pair strategy’s performance is likely to deviate from the past observed one. The commodity basket composition and any likely changes is purely at the discretion of the platform provider.
Any further increase in WTI & Brent crude oil will likely cause a corresponding spike in gasoline prices. However, should the end cost passed down by refineries/distribution companies not happen at the consumer level, gasoline prices may hold despite the rise in core crude oil prices.
The ongoing energy crisis overall will likely keep the energy markets over the edge. As a result, due to this increased volatility, the price-performance may sharply be impacted by the emergence of any other black swans (local government policies like subsidies, tax impact & emergence of other input sources for energy).
The past returns mentioned below do not consider any transaction costs including commissions and other charges.


The strategy is based on the past observed outperformance of Gasoline over the CMC Energy Index Basket. This is based on the last 3 years' duration (Since the incetion of CMC Energy Index Basket date of January 2019). Including the holding cost gains, the pair has returned an average of 27% over the last 3 years.

Past 3-Year Performance of Long Gasoline & Short CMC Energy Index Basket Pair

Source: Past Blomberg Data Calculations over Excel

Long Gasoline - Short CMC Energy Index Basket Perfomance
Long Gasoline Short CMC Energy Index Basket Pair P & L with HC
Open Close Gross P & L HC NET P & L Open Close Gross P & L HC NET P & L
2019 1.368 1.751 28% 31.42% 59.42% 849 1019.5 -20% -10.76% -30.84% 28.58%
2020 1.761 1.418 -19% 31.42% 11.94% 1032.77 784.65 24% 10.76% 13.27% 25.21%
2021 1.415 2.52 78% 31.42% 109.51% 787.28 1358 -72% -10.76% -83.25% 26.26%

*For 2021, the number are as of 19/10/2021 - European Afternoon Section
*P & L without comission and other charges

Long Gasoline - Short CMC Energy Index Basket Perfomance


Source: CMC Platform | Duration: Last 3 years

Macro reasons for going long on Gasoline

Gasoline is the energy commodity that primarily drives the global on-road & jet fuel transportation system. In the US and Latin countries, the term gasoline is used, but in Europe and Asian countries, this is equivalent to petrol. Major input consumer nations in Southeast Asia including India and China are seeing an increased demand revival for gasoline. India's gasoline consumption has increased steadily after hitting a 12-month low in May. Oil demand in China, the world’s top energy consumer, will be 13% higher next quarter than in the same period in 2019 before the pandemic.

For these countries, gasoline is also used as an energy source for construction and infrastructure building activity. Amongst all the energy derivatives, gasoline is considered to have the highest impact and correlation with spiraling inflationary price structures.

Saudi Arabia consumed more gasoline and less diesel in the first eight months of the year compared to 12 months ago. Other major hubs including the US & Canada are recording increased consumption and prices for this commodity. While the ongoing rise in gasoline prices is also on account of spiraling crude oil prices, gasoline price levels overall are expected to remain elevated as the global economies continue with their ongoing recovery and reopening theme.

Past Historical Performance of Gasoline when compared with other constituents of CMC Energy Index Basket (Last 5 years: January 2016 - Till Date).

For the CMC Energy Index Basket, WTI holds the largest weightage (39.30%), followed by Brent (26.81%). Other component weightages are Gasoline (8.5%), Natural Gas (8.86%), Low Sulphur Oil (8.59%), Heating Oil (7.94%). As seen from the accompanying chart, amongst major weighted components, Brent has largely outperformed Gasoline during most of the period.

Over this duration, gasoline has largely followed the broader price trend seen in the top component WTI. Natural Gas has outperformed all the components but due to its lower weight has failed to outsize the CMC Energy Index Basket gains over the last few years.

Gasoline v/s other components of CMC Energy Index Basket Comparison


Source: CMC Platform | Duration: Last 5 years

Risks and Assumptions for Back-tested trading strategies
The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg
Chart Source: CMC Platform
Data & Prices as of: 19/10/2021 European Afternoon Session

Arun Leslie John
Chief Market Analyst

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