COT: Agriculture leading a fund rush into commodities

Ole Hansen

Head of Commodity Strategy

Summary:  The Commitments of Traders report covering commodity positions held and changes made by money managers in the week to August 11. A rise in U.S. bond yields helped trigger profit taking across interest rate sensitive sectors, such as precious metals. A 3.7% jump in the Bloomberg Commodity Index driven by gains in all the major sectors, helped boost bullish commodity bets across 24 major futures contracts by 22% to 1.6 million lots, a 24-month high


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.

This summary highlights futures positions and changes made by speculators such as hedge funds and CTA’s across 24 major commodity futures up until last Tuesday, August 18. It was a strong week for risk with the S&P 500 adding 1.7% to its already strong gains, bond yields ticked higher while the Dollar Index dropped by 1.4% on weakness against all of its major peers. 

A 3.7% jump in the Bloomberg Commodity Index driven by gains in all the major sectors, helped boost bullish commodity bets across 24 major futures contracts by 22% to 1.6 million lots, a 24-month high. Twenty out of the mentioned 24 contracts were bought with the bulk of the net change being driven by the agriculture sector led by soybeans, corn, soybean meal and sugar.

Energy: Both Brent and WTI crude oil were two of just four contracts seeing net selling during a strong week for commodity risk. Some emerging nervousness helped attract fresh short selling from funds in response to crude oil’s failure to respond to a general level of raised risk appetite led by rallying stocks and a weaker dollar.

Latest: Crude oil may face a volatile week with U.S. hurricane threats being offset by a virus resurgence in Europe and Asia. Two hurricanes are forecast to hit the US Gulf simultaneously for the first time in recorded history. Tropical storm Marco and later in week Laura are both expected to become at least category 1 hurricanes. Production and refinery capacity as well as export and imports are all likely to be impacted. Energy firms have already started to shut down oil production from a region that accounts for about 16% of crude and 2.5% of U.S. natural gas production.

WTI crude oil remains stuck below $43/b, a level that has been rejected almost daily for the past two weeks while Brent remains range bound-between its 50-day moving average at $43.40 and the 200-day at $46.15.

Energy

Metals: Buyers returned to gold and silver for the first time in four weeks. This after both metals made a strong – and as it turned out temporary - recovery from the correction the previous week. In gold, however, the 3% increase in the net long to 155,274 lots was primarily driven by short-covering. Fresh longs were added to silver with the net long reaching 31,615 lots, some 37,000 lots below the February high. Back then the semi-precious metal traded $18.5/oz compared with the current $26.8/t. It highlights the continued hesitancy from funds to get involved following the July and early August surge.

Copper’s break above resistance at $3/lb (LME above $6600/t), helped trigger a 29% increase in the net-long to a fresh 26-month high at 60,974 lot. An increase that at the end of last week came back to haunt the market and helped trigger long liquidation and lower prices after it failed to establish support above the mentioned levels.

Latest: Gold and silver finished last week close to unchanged as the correction/consolidation continues. Friday’s weakness was led by a stronger dollar in response to stronger-than-expected U.S. economic data. Overall, however the impact was limited due to renewed weakness in US ten-year real yields as the rate dropped back below –1%. Focus in the week ahead will be Trump’s virus treatment news and Powell’s speech at the virtual Jackson Hole symposium. Key support remains ahead of $1900 while resistance has been established at $2015.

Precious and industrial metals

Agriculture: The grain sector saw a combined 198,000 lots of buying, led by the soybean complex and corn where funds are now the least bearish in four months. Length was added to all the four soft contracts led by sugar. In general the ten agriculture contracts (minus livestock) tracked in this report have seen the position shift from a 333k lots short in early June to a current long of 371k lots, the highest since May 2018. Surging Chinese demand combined with weather concerns and the weaker dollar have sparked renewed life into demand for investments in food commodities.

Latest: We will watching some of the major agriculture ETF’s, such as DBA:arcx, AIGA:xlon and RJA:arcx for signs of whether the multi-year downtrends can be challenged with this the latest pickup in prices and speculative interest. Also, this week on August 27, the International Grain Council will issue its latest global crop forecasts with the market looking for any signs of supply concerns to support the rally.

Key U.S. crop futures
Soft commodities
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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