COT update: Dollar long hits decade high as funds buy agriculture and cut energy and metals exposure

Funds buy agriculture while cutting exposure to rising energy and metals

Hedge funds turned net buyers of commodity futures for a second consecutive week in the reporting period ending 7 July. A weaker-than-expected US payroll report reduced concerns about further Federal Reserve tightening, while a modestly softer dollar and lower bond yields helped the Bloomberg Commodity Index rise 2.5%, recording its first week of broad-based gains in five weeks.

However, the headline increase in total commodity exposure concealed a notable divergence between sectors. Fresh buying was heavily concentrated in grains and soft commodities, while funds continued to reduce exposure across crude oil and precious metals despite rising prices. This mismatch highlights a market in which improving price momentum was met with caution rather than a broad return of speculative conviction.

Across the 24 major commodity futures contracts tracked in the table, the combined net long rose by 161,500 contracts, or 33%, to 652,600 contracts. As per the table below, nearly all the increase came from agriculture, where weather concerns in Brazil and West Africa combined with short covering to drive strong gains in prices and positioning.

The largest week-on-week increases were seen in corn, sugar and soybeans. The corn net long rose by almost 59,000 contracts as funds covered a sizeable portion of their short exposure, while the soybean net long jumped by 37,500 contracts. Sugar recorded a 52,900-contract improvement, although the market remained net short by almost 98,000 contracts. Coffee also attracted renewed buying as weather concerns supported a 7.1% weekly price gain.

Precious metals advanced during the reporting week, helped by the softer dollar and lower yields following the payroll report. However, funds used the rally to reduce exposure rather than add to bullish positions. The gold net long slipped by around 2,000 contracts despite a 2.9% price increase, while silver’s net long fell by 600 contracts as prices rose 2.3%. The divergence suggests that some investors viewed the move as an opportunity to take profits following the recent correction rather than the start of a renewed uptrend.

This cautious stance has since been reinforced by another escalation in the Gulf. Renewed US and Iranian strikes have lifted oil prices and revived inflation concerns, pushing bond yields and the dollar higher while weighing on non-yielding and growth-sensitive metals. Gold, silver and copper have all come under renewed pressure, while aluminium has found support from concerns about potential disruptions to Persian Gulf production. Attention now turns to Fed Chair Kevin Warsh’s first semi-annual congressional testimony, with markets looking for guidance on whether the renewed energy shock could alter the interest-rate outlook.

The most striking positioning discrepancy was in energy. WTI and Brent prices rose during the reporting week, yet funds continued to liquidate crude oil exposure. Selling was concentrated in WTI, where the net long fell by around 19,000 contracts, while the Brent position was broadly unchanged. Combined net length in the two contracts dropped to approximately 130,000 contracts - or around 121,000 excluding the smaller ICE WTI contract - the lowest in six months.

That reduced exposure left the market vulnerable to a short-covering rally when tensions surrounding the Strait of Hormuz escalated after the reporting cut-off. Brent subsequently jumped towards USD 80 per barrel as renewed attacks raised concerns about the safe passage of energy exports through the waterway.

For now, the relatively modest premium for prompt crude suggests the physical oil market remains orderly. The greater stress is in refined products. The gasoil net long jumped 20% during the reporting week, while US heating oil also attracted fresh buying. Russia’s decision to ban diesel exports until the end of July has intensified an already tight global market following refinery and shipping disruptions linked to the Gulf conflict. Russian seaborne diesel and gasoil exports reportedly fell sharply in June and remained subdued in early July, supporting stronger refining margins and renewed speculative demand.

Overall, the latest data show funds cautiously rebuilding commodity exposure, but with conviction largely confined to weather-driven agriculture and supply-constrained refined fuels. The continued selling of crude into rising prices has left it vulnerable to sharp positioning-driven moves as geopolitical and monetary-policy risks evolve.

What is the Commitments of Traders report?

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 main reasons why we focus primarily on the behavior of speculators, such as hedge funds and trend-following CTA's 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

Do note that this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.