Head of Commodity Strategy
The Middle East war is supporting a stronger U.S. dollar primarily through safe-haven demand, energy-price dynamics and positioning adjustments. When geopolitical risk rises and oil prices surge, global investors tend to move capital into dollar-denominated assets while energy-importing economies weaken. With that in mind, flows were unsurprisingly tilted heavily toward dollar buying in the latest reporting week to 10 March, as speculators continued to rein in an elevated dollar-short position. Currencies and economies most exposed to surging energy prices came under pressure, led by a 23%—or USD 4.6 billion equivalent—reduction in the EUR long ahead of an extended slide in EURUSD to a seven-month low. Meanwhile, short positions in JPY and GBP increased by USD 2 billion and USD 1 billion respectively. Over the past three weeks, the buildup to and subsequent outbreak of hostilities in the Middle East have triggered a sharp reduction in bearish dollar positioning. Gross dollar shorts versus eight IMM futures have been cut by around 80%, leaving the remaining short at USD 4.7 billion.
The Bloomberg Commodity Index rose 4.1% during the reporting week to 10 March, with gains recorded across all major sectors. Energy led the advance amid the ongoing escalation in the Middle East, driving what has become the largest disruption to global flows of crude oil and refined products in decades. Safe-haven demand also lifted precious metals, while industrial metals were supported by surging aluminium prices amid disruption risks to supply from the Persian Gulf. The biofuel and ethanol link to rising energy prices supported gains in grains and soybeans, as well as sugar, while food security concerns helped underpin demand for wheat.
In energy, the combined crude oil net long in WTI and Brent jumped by 83k contracts to a 15-month high of 466k, with traders clearly not seeing any immediate relief from the unprecedented stockpile release organised by the International Energy Agency. The increase was driven primarily by fresh longs being added while short positions were reduced. At the same time, surging fuel prices and rising volatility triggered some positioning reductions from hedge funds, with both long and short positions being trimmed across the gasoline and diesel contracts.
Traders remained hesitant to add length in precious metals despite strong gains, with most of the net increase driven by short covering rather than fresh longs, highlighting markets that remain in consolidation mode following a year-long rally that lifted prices substantially. Copper saw net selling extend to an 11th week, albeit at a slowing pace, as stockpiles monitored by the three major exchanges continued to rise strongly, reaching a multi-decade high.
Strong buying across the grains sector lifted the combined net long across six contracts to a June 2022 high of 592k contracts, with fresh year-on-year highs recorded in soybeans, corn and KCBT wheat. Despite the latest buying—supporting a strong and continued rebound from USD 5 per bushel support—the CBOT wheat contract maintained an overall net short for an unprecedented 178 consecutive weeks since October 2022. Meanwhile, the ethanol connection also supported short covering in sugar, while a 14% rebound in cocoa from a three-year low triggered a meaningful amount of short covering.
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:
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.
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