COT Report: Elevated commodities longs face short-term risks as Trump 2.0 era begins

Commodities:

In commodities, aggressive hedge fund buying persisted for a third consecutive week through January 14, pushing net long positions across 26 major futures contracts to a near three-year high of 1.56 million contracts, valued at approximately USD 150 billion. With managed money accounts focusing mainly on momentum, the broad rally seen during the first two trading weeks of January helped drive the rapid accumulation of longs. This has inadvertently left some of those gains exposed to profit-taking, especially with Trump’s return to the White House potentially signaling a period of uncertainty and turmoil.

In the latest reporting week, the energy sector gained 6.8%, grains 3.3%, and industrial metals 2.2%. It is no surprise that the most sought-after commodities belonged to these sectors, with buying led by crude oil, natural gas, copper, soybeans, and corn. Additionally, fresh demand for gold and continued buying across livestock made up the bulk of last week’s net buying.

The much-talked-about dislocation between metal futures traded in New York—where prices have spiked relative to their corresponding spot prices in London—did not have any material impact on gold and silver demand. However, it was a key source of buying for copper and platinum through short covering.

In a recent update, I wrote the following:

“Regarding the uprooting of normal trading dynamics, we focus on recent developments in US-traded futures markets, particularly for metals such as HG copper, gold, silver, and platinum. In these markets, prices have risen to levels relative to spot prices that are not justified by the typical costs associated with funding and storage. The New York futures market, with its deep liquidity and round-the-clock trading, is frequently used by traders and banks to hedge physical market commitments through short selling.

However, Trump’s pledges to impose universal tariffs on all goods from all countries have raised concerns. Specifically, these tariffs could increase the cost of holding short positions for future delivery. If the required metals to cover a short futures position need to be imported, the additional tariff costs could make short selling significantly more expensive.”

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.

Recent commodity articles:

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