COT: Fund long increasingly skewed towards energy sector
Head of Commodity Strategy
Summary: Futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, June 8. A week where U.S. equities climbed within a whisker of their all-time highs and Treasury yields continued their decline. The dollar traded close to unchanged while the Bloomberg Commodity spot index, led by strong gains in energy, reached a six-year high. In response to these speculators continued their recent rotation out of agriculture and into energy while the dollar short continued to climb
The below summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, June 8. A week where U.S. equities climbed within a whisker of their all-time highs and Treasury yields continued their decline led by lower inflation expectations (breakevens) falling to a five-week low. This after the monthly job report missed expectations, thereby supporting the view the Fed is unlikely to have their hand forced when it comes to the timing of tapering. The dollar traded close to unchanged while the Bloomberg Commodity spot index, led by strong gains in energy, reached a six-year high.
The commodity sector saw net buying for a second week, but once again the increase was solely driven by the energy sector with net selling hitting both metals, both precious and industrial as well as agriculture. Overall the combined long across 24 major commodity futures rose 2% to 2.42 million lots, representing a nominal value of $149 billion. Since hitting a record high in the week to May 11 at 2.53 million lots the energy sectors percentage of the total long has risen from 44% to 49%, metals have stayed unchanged at just 9% while the agriculture sector has gone from 47% to 42%.
As mention, most of the buying was concentrated in energy led by natural gas (+31.4k), WTI (+27.9k) and Brent (23.5k) with biggest reductions seen in corn (-14.3k), sugar (-6.1k) and platinum (-4.4k).
Metals: Funds sold gold for the first time in six weeks while copper selling took the net long to near a one-year low and down 73% from the December peak. Platinum was the biggest casualty with the net long being cut by 30% while silver saw a small increase.
Latest update from our Daily Market Quick Take: Gold (XAUUSD) continued lower in Asia with as US real yields and especially the dollar trading higher as the market focus on transient inflation while speculating that the FOMC may strike a more balanced tone at its meeting on Wednesday. Silver (XAGUSD) meanwhile trades near a one-month high against gold after attracting some tailwind from recovering industrial metals. The weekly COT update covering the week to June 8 saw funds sell gold for the first time in six weeks following the loss of momentum. Support at $1856 followed by the 200-day MA at $1840.
Agriculture: On grains the report showed a net 14.5k lots reduction to 543k lots, the lowest bet on rising prices since last September. Despite rallying 6%, the corn long was reduced by 14.3k lots to 275k lots, and since the April peak it has been cut by one-third. Elsewhere wheat and soybeans saw small changes. The softs sector saw reductions led by sugar followed by cocoa and coffee, all three primarily due to fresh short selling.
Energy: The switching of exposure from agriculture to energy primarily benefitted Brent and not least WTI where the net long rose 7% to 410k lots, a near three-year high. Adding Brent, the total crude oil long reached a not yet elevated five-week high at 701k lots. Returning to WTI, the highest close since 2018 above $70 resulted in the long/short ratio hit 14.8, also the highest since 2018.
Latest update from our Daily Market Quick Take: Crude oil (OILUKAUG21 & OILUSJUL21) trades higher led by the WTI which has reached a fresh 32-month high. Driven by buyers switching exposure from metals and agriculture (see below) in the belief rising global demand, forecast by the IEA to reach pre-pandemic levels late next year, and gradual supply increases by OPEC+ will keep the market sufficiently tight to support higher prices. As a result, speculators have increased their combined WTI and Brent long to a five-week high with inflows skewed towards WTI where the net long reached a near three-year high. Brent’s next upside target is $75.6 followed by $78, the downtrend from the 2008 high.
In forex, and just like the previous week, the flows were with the overall action still skewed towards continued dollar selling. The net short against ten IMM futures and the Dollar Index reached a 13-week high at $18.2 billion after speculators net sold $600 million. Buying of JPY (9.8k), GBP (3.6k) and BRL (16k) being partly offset by selling of AUD (7.5k), CAD (3.5k) and EUR (2.1k)
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
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.