Summary: Hedge funds cut bullish commodity bets to a 40-month low in the week to May 7. The 41% reduction to just 219k lots was broad-based with all sectors being sold in response to renewed trade war and demand concerns.
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.
To download your copy of the Commitment of Traders: Commodity report for the week ending May 7, click here.
The biggest casualties were WTI crude oil, HG copper, soybeans, sugar, cotton and live cattle. Only six out of 24 commodities were bought with gas oil, corn and gold attracting most of the attention.
Note: See page 3 in the attached report for detailed descriptions of the different data points in the below report
Crude oil positioning continued to diverge with accelerated selling of WTI (-29k lots) being partly offset by the continued buying of Brent (+2k). The behaviour of Brent especially raising questions about the strength of the current price weakness.
1)The steepness of the Brent forward curve points to an increasingly tight physical market caused by multiple voluntary and involuntary supply disruptions.
2)During the last two reporting weeks Brent sank 5.4% while the net-long increased by 10k lots. Last week most of the increase in the net-long was due to short-covering not long liquidation, another sign of limited selling appetite despite lower flat (spot) prices.
Gold was bought for a second week but the limited amount of short-covering highlights the yellow metal's current struggle to gain momentum. All other metals were sold, not least HG copper where the net-short jumped by 173% to 27k lots, a 14-week high.
The combined grain short saw a small reduction with planting delays supporting short covering in corn while trade war concerns and demand worries hit soybeans. The week went from bad to worse when the USDA in their monthly WASDE report on Friday forecast bigger-than-expected U.S. supplies of all three major crops (table). Soybeans dropped to lowest since 2008 while July corn hit a contract low.
COT on grains:
In soft commodities the sugar net-short almost doubled while cotton returned to a net short following a week where the trade war raised demand concerns and the price sank to a an 18-month low.
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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With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
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