COT: Energy and metals sold ahead of OPEC+ and FOMC meetings
Head of Commodity Strategy
Summary: The COT reports published weekly by the US CFTC highlight futures positions and changes made by hedge funds across commodities, forex and financials during the latest reporting week to last Tuesday, November 2. A week where major US stock benchmarks reached fresh all-time highs just a day before the FOMC policy decision. The dollar rose, bond yields dropped while commodities took a hit with broad selling across energy and metals being partly offset by gains in grains.
This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, November 2. A week where a continued rally in stocks pushed major US benchmarks to their all-time highs just a day before the FOMC policy decision. The dollar rose while bond yields dropped following a dovish statement from the Australian central bank. The drop in 10-year bond yields was driven by a major shift between falling inflation expectations (breakevens) and rising real yields.
The Bloomberg Commodity Index took a 1.4% hit with selling across energy and both metal sectors being only partly offset by gains in grains and some soft commodities.
Hedge funds turned sellers of all energy contracts as well as gold, silver and copper during the latest reporting week to November 2. Jitters ahead of OPEC+ and FOMC meetings as well as China growth worries all contributed to the long liquidation seen. Against this, the agriculture sector saw net buying for a second week, led by the grains sector. Overall the net long across the 24 major contracts tracked held steady just above 2 million lots.
Energy: In energy the net selling of WTI and Brent extended to a fourth week with the combined net long being reduced by 27k lots to a two-month low at 573k lots. Brent longs were already being reduced before the price on October 26 fell short by 4 cents in touching the 2018 high, and since then long liquidation has picked up. It is worth noting that the impact of last Wednesday’s slump was not recorded in this week’s data. With all fuel products also being hit by profit taking the total 50k lots reduction was the biggest sector reduction since August.
Metals: The gold long saw a small 2.3k lots reduction following the 32k lots increase the previous week, while silver’s 2.4% price drop helped trigger an 18% reduction in the net long on a combination of long liquidation and fresh short selling. In gold, and given the cutoff date last Tuesday, the slump to $1759 on Wednesday and the subsequent surge on Friday to $1818, the highest weekly close since early September, was not reflected in this report. Copper’s net long was cut for a second week to 35.4k lots, thereby returning to the level held before the recent roller coaster ride from $4.35 to $4.75 and back.
Agriculture: Another week of strong gains for the grains sector helped support across-the-board buying of all six contracts. The 129k lots increase, the biggest weekly addition since September 2020 lifted the net long by one-third led by corn and soybeans. In Chicago wheat, the net flipped back to a long for the fifth time this year. Soft commodities were mixed with buyers returning to sugar following almost non-stop net selling since August. The cocoa long was cut by 77% while a renewed cotton surge, this time by 6.5% only helped attract a small 2% increase in the net long.
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Crude oil trades higher today, thereby extending the recovery from Friday as the market weighs President Biden’s limited options to bring down prices of crude oil and gasoline. The reasons behind OPEC’s lack of interest in helping to quell the month-long rally was made clear by the Saudi oil minister after he argued that the current energy crisis had been caused by decades of anti-oil policies leading to underinvestment, and it wasn’t the producers' job to fix it. Focus this week on monthly oil market reports from EIA and OPEC (IEA next week) as well as comments from the US administration, and not least whether Europe, as promised by Putin, will see increased gas flows. So far it doesn’t look promising with Dutch TTF trading up 8% with no signs of increased flows on the important Mallnow line through Poland to Germany. Failure could support gas and oil through increasing switching demand.
Gold (XAUUSD) reached a two-month high in Asia at $1821.6 while silver (XAGUSD) has broken the downtrend to potentially setup another challenge at $25. The extensions follow a strong end of week rally that, despite the stronger dollar, was driven by the dovish messages from the FOMC and the Bank of England, and a strong US jobs report pointing to increased wage pressures. US ten-year real yields trades lower with focus now turning to US CPI on Wednesday and whether gold can find enough momentum to challenge key resistance at $1835.
The aggregate dollar long against ten IMM currency futures and the Dollar Index was reduced for a third consecutive week. However, the modest 2% reduction to $22.6 billion highlighted a week of relatively muted flows, with the only notable change being some buying of EUR (+5.1k lots) and NZD (5k). Overall, the nominal exposure on both the long and short side were reduced with traders scaling back positions and exposure ahead of Wednesday’s FOMC meeting.
In terms of extended short positions compared with recent history, the most notable was the near two-year high in CHF (-20.6k), near three-year high in JPY (-108k) and MXN where the net short reached a level last seen in early 2017.
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