COT: Broad risk reduction from funds failed to spoil strong Q1 for commodities

Ole Hansen

Head of Commodity Strategy

Summary:  The below summary highlights futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, March 30. A week that saw renewed selling of the tech heavy Nasdaq, as US ten-year yields climbed to the highest since January 2020 and the dollar rose. The Bloomberg Commodity index finished a strong quarter despite five consecutive weeks of net selling from hedge funds.


Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, March 30. A week that saw renewed selling of the tech heavy Nasdaq, as US ten-year yields climbed to the highest since January 2020 on rising consumer confidence and the prospect for more stimulus. The S&P meanwhile reached a fresh record high while the dollar also saw fresh gains. The Bloomberg Commodity index traded softer with selling in metals, grains and softs more than offsetting strong gains in energy and livestock.

Commodities

Speculators cut bullish commodity bets for a fifth week to the lowest since early December during the week to March 30. With 16 out of 24 futures contracts being net sold the total net-long dropped by 7% to 2.26 million lots or $113.4 billion equivalent. Despite rallying 5% on the week, the biggest reduction hit crude oil with the net long in Brent falling to a four-month low. Outside the energy sector, the agriculture sector saw the biggest reductions led by soybeans, wheat, cocoa and sugar. Corn was the biggest exception after the net-long climbed to a ten-year high ahead of what turned out to be a surprisingly bullish Prospective Planting report on March 31.

Energy: Speculators made the biggest reduction in six months to their exposure in six oil and fuel contracts. The 60k lots reduction to 835k lots was however mostly driven by a 51.5k lots reduction in the Brent crude oil net-long to a four-month low. Overall the combined net long in WTI and Brent dropped by 46k lots to an 11-week low at 659k lots.

Latest on crude oil: Crude oil (OILUSMAY21 & OILUKJUN21) experienced a volatile Easter period with the OPEC+ decision to ease production curbs initially sending prices higher, as it sent a signal of optimism, before turning lower on worries about increased supplies from Iran, who currently ship 1 million barrels/day of sanctioned oil to China and another wave of corona virus cases. Exempted from supply restrictions due to sanctions Iran can produce at will as long it can find buyers willing to take the risk. Iran and U.S. will take part in indirect talks today in Vienna on the Iranian nuclear agreement. For now, Brent crude oil remains locked in a wide $60 to $65 range. Focus today the monthly “Short-term energy outlook” from the EIA and its projections for US production and global demand.

Metals: It was a relatively quiet week in metals with continued price weakness driving a relative small reductions in gold, silver and copper. The latter saw its net-length drop to an eight month low as the price continued to consolidate but without triggering a major correction.

Latest on gold and copper:

Spot Gold (XAUUSD) - remains rangebound but following another firm rejection below $1680 last week, the market is pondering whether the double bottom has sowed the foundation for a recovery. After losing 10% during the first quarter to come bottom of the performance table, the technical level it needs to break as a minimum remains at $1765. For now, however, most of the recovery has been a result of a weaker dollar and yields that have stopped rising. Stronger than expected inflation remains gold and with that also silver’s best chance of a recovery.

Copper surged higher in thin holiday trading on Monday in response to Chiles announcement on Friday it would shut it borders throughout April in order to battle a deadly surge in coronavirus cases. Together with its next-door neighbor Peru it supplies around 40% of global output and while Chile said production is safe (hence the softer tone today) the risk of a supply disruption from mine closures combined with the prospect for strong demand is likely to keep prices supported. Having cut bullish bets by 50% during the past six weeks, a break above $4.2/lb may be the trigger that forces funds back on the buying side.

Agriculture: Grains which all traded lower on profit taking ahead of the March 31 Prospective Planting report from the US Department of Agriculture resulted in mixed reactions from speculators. While soybeans and wheat both saw long liquidation, the corn long reached a ten-year high at 396k lots. Overall the net long across six soy and grains contract saw the biggest one week reduction since last May and at 684k lots, corn now accounts for a whopping 58% of that net length.

Despite the mentioned five weeks of selling which reduced bullish commodity bets by 18% from the February record peak, the first quarter nevertheless showed strong returns across the commodity sector with a continuation from last year being led by the prospects of a vaccine-led growth sprint, the green transformation theme attracting increased demand for key metals combined with continued generosity from central banks and governments.

The Bloomberg Commodity index rose by 7% during the quarter, a result that would have been even higher if the stronger dollar and rising bond yields hadn't sent gold and silver lower to end the quarter as the worst performing commodities. 

Forex

Speculators reduced their short dollar position further in the week to March 30 where the broad Bloomberg Dollar index rose 0.7% and the euro slumped to a near five-month low near €1.17. Against ten IMM currency futures and the Dollar Index the combined short was cut by one-quarter to $7.4 billion, a nine-month low.

Six weeks of aggressive yen selling lifted the JPY short to a near two-year high at 59.5k lots or $6.7 billion equivalent, while accelerated selling of euros saw the net long slump to a ten-month low at 73.7k lots ($10.8 billion). Partly offsetting these were buying of Sterling, Aussie and Mexican peso. 

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 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

 

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