COT: Commodities hurt by trade wars and stronger dollar

Ole Hansen

Head of Commodity Strategy
Ole Hansen joined Saxo Bank in 2008 and has been Head of Commodity Strategy since 2010. He focuses on delivering strategies and analyses of the global commodity markets defined by fundamentals, market sentiment and technical developments.

Please click to access the COT commodities report for the week ending July 17, 2018.

Having returned from my summer break I find markets that have yet to settle down and exhibit the tight trading ranges that normally occurs this time of year. Instead we have commodity markets still being ravaged by the "trade war equals lower growth and demand narrative". 

After reaching a three-year high back in May, the Bloomberg Commodity Index has since succumbed to a near 10% correction before recovering last week after President Trump went on the offensive against the stronger dollar, another key component to the price weakness witnessed during the past few months. 

Gold and other commodities found a bid last week as the dollar weakened after  Trump tweeted that China and the European Union have been manipulating their currencies. 

The year-to-date performance, including roll, of the key commodities that make up the Bloomberg Commodity index shows how Brent and WTI, despite the recent setback, remain two of the best performing commodities so far this year. A few agriculture commodities led by cocoa and cotton, together with nickel, also trade in the black while major losses have been seen among industrial metals, natural gas and the soft commodities of sugar and coffee. 

Source: Bloomberg, Saxo Bank

As a result of these developments, leveraged funds have spent the past few months cutting exposure in some commodities while accumulating new short positions in others.  During the week to July 17 funds cut bullish commodities bets by 30% to 783,000 lots, a 13-month low. The energy sector led by crude oil remains the only sector where funds maintain an overall bullish position with net-short positions now being held in metals, grains and softs.

Table covering hedge funds positions and changes in the week to July 17:

Hardest hit last week was interestingly enough the energy sector which saw heavy selling across all six contracts. Not least crude oil where the combined net-long in WTI and Brent slumped by 129,000 lots to 777,000 lots, a nine-month low. This was the biggest weekly reduction since April 2017 and was driven by rising demand concerns related to the ongoing trade war and reduced worries about tightening supply after recent supply outage concerns began to ease. 

Gold’s continued slump to a one-year low helped trigger another week of heavy short-selling by funds. The net-short reached 22,000 lots, just shy of the 24,000 lots record seen in December 2015. Back then this bearish view was reached just before the first US rate hike signalled a low point from where gold rallied strongly. The current gross-short of 132,000 lots has never been seen bigger and it has left gold in a much better position to react to price-friendly news such as last week’s attack on the stronger dollar by President Trump.

HG copper and industrial metals in general have been hurt by the "trade war leading to lower growth" narrative. As a result, funds continued to accumulate fresh copper short positions last week with the net-short jumping by 84% to 24,000 lots, a 22-month high. Platinum’s record short continued to rise while funds were the least bullish on palladium since 2012.

Selling of the three major crops slowed as trade war concerns were being somewhat offset by weather concerns, not least related to wheat. The combined net-short reached 184k lots, a far cry from the record 406k long seen just four months ago.

In soft commodities the net-short in coffee hit a new record high at 90,000 lots while additional short positions were added to sugar. The cotton long/short ratio meanwhile reached 30.5, a 7½ year high after longs were added and short positions were reduced after the US on July 12 cut one million bales from its harvest forecast. With more than 30 longs per one short this market could be at risk should price-friendly news dry out and/or the technical outlook show signs of deteriorating.

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