COT: Funds exit commodity longs on demand concerns

Ole Hansen

Head of Commodity Strategy

Summary:  Hedge funds cut bullish commodity bets by one-third during the week to February 4. It covered a period where global markets maintained a close eye on China and the continued spreading of the coronavirus. This in order the ascertain its impact on Chinese and global growth. The broad based selling was led by crude oil, gold, copper and soybeans.


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.

Of all sectors, commodities – for now -  remain the one caught in the cross-hairs of the virus outbreak. In my latest Weekly Commodity Update I wrote: “Commodity markets continue to bear the brunt of the coronavirus outbreak in China. The concern remains that the wider markets have yet to reflect the full impact of the disruption. With China being the world’s most dominant consumer of raw materials, the impact continues to be felt strongly across key commodities and the world is facing the biggest demand shock since the 2009 global financial crisis.”

Hedge funds and large speculators responded to these developments by cutting bullish bets across the sector by one-third or the equivalent of $20 billion. This the biggest one-week reduction since December 2017 was broad-based with 19 out of the 24 futures contracts being net-sold.

Hardest hit was the energy sector as reports began pointing to a 3 million barrels/day drop in Chinese demand. The combined net-long in WTI and Brent crude oil slumped by 94k lots on top of the 83k lots that was sold the previous week. At 484k lots the combined long was still 195k lots above the low last October when Brent reached a $56.15/b low. It closed on Friday at $54.5/b. 

With this in mind the market will be paying close attention to continued efforts from the OPEC+ group of producers. While a 600,000 barrels/day cut was discussed last week in Vienna some uncertainty exists with regards to whether Russia will be prepared to join this effort. Failure to do so could potentially unleash another wave of long liquidation given the risk of sub-50 dollar Brent. 

Slumping natural gas prices in Europe and Asia kept US prices under pressure as well. The combined net-short of four Henry Hub deliverable contracts (futures and swaps) reached a fresh record of 298k lots, almost 400k lots below the five-year average.

For natural gas producers a slowdown in demand from China could not happen at a worse time with global inventories already elevated following a mild Northern Hemisphere winter. In Europe, the Dutch TTF contract dropped to the lowest since August 2009 while in Asia the Japan/Korea LNG (Liquified Natural Gas) contract hit a record low at $3/MMBtu.

All of this being bad news for an already depressed U.S. natural gas market where robust production growth has increasingly been relying on exports through LNG to curb inventories.

Gold longs were cut by 18% or 46k lots to an eight-week low after the price had struggled to respond to an overwhelmingly bullish backdrop of lower stocks, bond yields and general virus uncertainty. The fact that it managed to hold support at $1550/oz last week while ETF holdings rose to a record calmed the nerves with underlying support still strong.

The HG copper short more than doubled to 47k lots as funds sold into the bounce early in the week. This despite support from Peoples Bank of China which returned to work after the Lunar New Year to cut rates and add liquidity. With half of the global copper demand coming from China the metal has become a key proxy for the short to medium term outlook in China. Hence the increased selling from funds using copper as a hedge against economic weakness.

In agriculture the risk of slowing Chinese demand hit the soybeans complex hard with funds selling 85k lots across beans, meal and oil. Elsewhere the Chicago wheat long reached a fresh 17-month high. Following a near one-third price collapse since mid-December, the net position in Arabica coffee finally returned to (almost) neutral at 4k lots.

Cocoa went against the prevailing trend with funds increasing their net-long to 67k lots, the highest in more than five years. Cocoa has enjoyed a strong rally so far this year with lack of rain in key production areas of West Africa, the world's top producer, raising concerns over yields. 

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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