Beyond Market Labels: The Complexities of Commodity Diversification

Diversification in commodity portfolios is more complex than simply owning multiple markets. A portfolio containing crude oil, Brent crude, heating oil, gasoline, and gas oil may technically have five different markets, but these markets are often influenced by the same forces and frequently move together.

A correlation analysis of weekly price changes over five years across major commodity markets showed a high correlation between WTI Crude Oil and Brent Crude, as well as heating oil and gas oil. However, natural gas had very different correlations with these petroleum markets, ranging from -26% to -69%, indicating it is driven by weather, storage, and regional supply conditions.

Diversification should not be reduced to rigid sector limits. A portfolio could hold multiple positions within the same commodity class while expressing different spread directions. For example, a portfolio might be short CL and RB spreads while simultaneously long HO and GO spreads.