COT: Commodities show record position squaring

Ole Hansen

Head of Commodity Strategy

Summary:  From broad-based selling in previous weeks, as the economic outlook deteriorated, hedge funds last week turned to all out position reduction. A record amount of long and short positions were closed as the dash-for-cash stampede took hold.

Saxo Bank publishes two 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 24 major commodity futures up until last Tuesday, March 17. During this period deleveraging and the dash-for-cash hit a fresh peak. The dramatic reduction in exposure, both long and short, was seen across all asset classes, not just commodities. 

Hedge funds reduced long and short positions by a record 1 million lots during reporting week. As deleveraging accelerated the appetite for chasing the markets suffered. This is highlighted in the report with the broad based sell-off attraction short-covering instead of the fresh selling. Brent crude with its terrible demand outlook was the exception.  

The extend to which deleveraging drove the market action during the reporting week is clear to see from the below chart. Gross long and short positions were reduced by a more than 1 million lots, some 400k lots above the previous one-week reduction record. 

Crude oil positions diverged for a second week as the WTI net-long rose by 9k lots while Brent saw a 75k lots reduction to 79k lots, the lowest since November 2014.

The usual tight trading correlation between WTI and Brent has temporarily broken down with daily price swings of more than 10% and volatility close to 200%.

Brent is the contract that best reflects the global demand shock and the challenge it is to swallow all the additional supply from Russia and the Middle East over the coming months. The WTI contract was net bought last week, probably in response to speculation that the US would support the domestic market. It helped reduce WTI's long-held discount to Brent, so much that it temporarily disappeared before widening again to the current$3.2/b.

While gross long positions in both were reduced amid the 22% sell-off, the WTI gross short was cut by 28k lots while 30k lots were added to Brent. Overall the combined net-long dropped to 202k lots, a level this low last seen in December 2012.

The gold long was cut by 31% to 177k lots, a nine-month low, while silvers collapse to a near decade low reduced the net-long by a relative small 20%. This after short-sellers cut positions instead of adding into the weakness. HG Copper was another example of the lack of risk appetite. Instead of attracting fresh selling on the break below key support the net short was in fact reduced by 1k lots

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

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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