COT: Copper and silver see strong speculative demand

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, October 19. A week where risk appetite returned with a vengeance to send the S&P 500 higher by 4% and the VIX index down to near a 20-month low. The dollar weakened against a basket of major currencies while bond yields ticked higher led by rising breakeven yields as a more persistent inflation view started to gain some traction. Gains across most commodities with the exception of softs and natural gas was met by a mixed reaction from hedge funds.

Commodities

A 1.1% rise in the Bloomberg Commodity Index to a fresh multiyear high failed to attract a buying response from hedge funds. Despite broad gains with softs and natural gas being the few exceptions, the net long across 24 major futures contracts was cut for a second week.

Buying was contracted in HG Copper where an 8.7% surge helped drive a 52% increase in the net long while silver’s 6.1% rally helped support a tripling of the net long to 14.6k lots. Apart from a 15% reduction in the notorious volatile natural gas contract, the reaction across the energy sector was mixed with gas oil and gasoline in demand while the combined crude oil net long was reduced for a second week as WTI buying continued to be offset by selling of Brent. During this time the WTI long has increased by 31k lots while the Brent long has been cut by 56k lots.

In agriculture heavy selling of soybeans continued with the net long falling to 18k lots, a level that was last seen 16 months ago just before China started hoovering up supplies. Overall, the net long in corn, soybeans and wheat dropped to 220k lots, a 61% reduction since the April record peak. Heavy selling in sugar and cocoa also helped drive a sharp reduction in bullish bets while a 4% correction in coffee only cut the net long by 1%.

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Crude oil (OILUKDEC21 & OILUSDEC21) continued higher in Asia with Brent crude now trading within striking distance of the 2018 high at $86.75 with WTI trading at a fresh seven-year high. The market remains bid with OPEC+ sticking to its cautious production increase approach siting the threat to demand still posed by the pandemic.Thereby ignoring the unfolding energy crisis which according to estimates could see gas-to-oil switching add up to one million barrels ofadditional oil demand this winter. Focus this week on dwindling US stock levels and China which is facing renewed Covid-19 outbreaks after infections spread to 11 provinces. 

Gold (XAUUSD) and silver’s (XAGUSD) recent strong run of gains received a temporary setback on Friday in response to a sudden boutoftaper tantrum following comments by Fed chair Powell. At the same time, however he talked down the risk of raising interest rates while also expressing concern over persistently elevated inflation. Focus on dollar which continues to lose momentum and bond yields where the recent yield rise has primarily been driven by a reprising of inflation, thereby keeping real yields deep in negative territory. Resistance at $1814 followed by the big one at $1835. 

Grain prices trading higher led by wheat which rallied strongly last week, amid increasing demand for all types of wheat and stockpiles potentially heading for a five-year low at the end of the 2021-22 season. Adding to this surging fertilizer and fuel prices rising costs for farmers and a three-month U.S. weather forecast calling for drought in key growing areas such as Kansas. The benchmark futures contract for soft winter wheat (WHEATDEC21) has returned to $7.63 ahead of $7.86, the eight-year high reached in August. 

Forex

The aggregate dollar long against ten IMM currency futures and the Dollar Index was reduced by 3 percent to $24.9 billion in the week to last Tuesday. Still close to the largest bet on a rising dollar since June 2019, the small overall change hid a fair amount of cross activity, as specs were notable buyers of CAD, GBP, AUD and EUR while CHF and not least JPY selling continued apace. The 26k lots of JPY net selling increased the net short to the highest since December 2018 while the net CHF net short reached a 22-month high.

Following almost 18 weeks of continued buying, the Dollar Index long reached a two-year high at 35.9k lots, still less than half the record 81k lots from March 2015.

Among the minor currencies the most notable change was 2.8k lots of RUB buying taking the net long to 22k lots, the highest reading since March 2020 just before a collapsing oil price sent the Ruble sharply lower.

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

• They are likely to have tight stops and no underlying exposure that is being hedged
• This makes them most reactive to changes in fundamental or technical price developments
• It provides views about major trends but also helps to decipher when a reversal is looming