COT update: Energy correction masks resilient metals demand amid fragile peace hopes

Commodities

The latest COT reporting week captured a period where traders attempted to price in the prospect of a still elusive Iran–US peace deal. This focus weighed on the dollar, while U.S. bond yields eased across the curve amid reduced inflation concerns.

The main driver of price action was the energy sector which, after weeks of strength, dropped 12.5%. With only partial support from gains in precious and industrial metals, the Bloomberg Commodity Index ended the week down 3.5%. 

Energy: 
Despite a 12% price slump, the net long remained elevated at 373.4k contracts, leaving the market exposed to further long liquidation - evident last Friday when an ultimately unfounded peace-driven sell-off pushed prices down by 9%. In WTI, the net position was little changed, with selling on ICE broadly offset by buying on CME.

In early Monday trading, Brent crude and European natural gas prices recovered most of Friday’s losses as hopes for a peace deal faded following a weekend of renewed tensions and confusion. Traders had entered the weekend expecting the Strait of Hormuz to reopen, only for it to be effectively closed again within hours after the IRGC claimed a US blockade of Iran-linked vessels violated the ceasefire agreement set to expire Tuesday. Additional support came after the US Navy fired upon and seized an Iranian vessel, further undermining confidence in near-term diplomacy. Iranian officials have since signalled they are unlikely to attend planned talks in Islamabad. Brent briefly touched USD 86 on Friday before rebounding above USD 95, with resistance emerging near USD 100.

Metals:
Gold recorded its strongest week of demand in four months, with 6.7k contracts added, lifting the net to a four-week high of 98.9k contracts from a two-year low the previous week.

Demand for silver and platinum remained subdued, while copper attracted strong buying, with the net long rising by one-third to a two-month high. Support came from improving demand signals in China and concerns about emerging shortages of sulfuric acid, a key input for copper mining in South America. As a by-product of oil and gas production, around a quarter of global sulfuric acid supply originates from the Persian Gulf, where flows have been disrupted since the Strait of Hormuz closure on 28 February.

Grains:
Heavy short selling reduced the corn net long by 27% to 159.5k contracts. Wheat positioning was mixed, while soymeal saw a 45% increase in net longs to 136k, the highest in 29 months. Overall, the soybean complex - soybeans, meal, and oil - holds a record net long of 459k contracts, representing a nominal value of USD 21 billion.

Softs:
Aggressive fresh selling more than doubled the net short in sugar as ethanol-related support faded. Cocoa shorts rose to a November 2022 high of -18.1k contracts. Meanwhile, six consecutive weeks of strong buying flipped cotton back to a net long for the first time in two years.

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.