COT: Speculators reaction to historic crude oil slump

Ole Hansen

Head of Commodity Strategy

Summary:  Hedge funds reaction to the historic price slump in crude oil was to cover short positions and add fresh longs. The latest Commitments of Traders report found that speculators increased bullish oil bets to a two-month high in the week to April 21. Away from the buying crude oil and natural gas most other commodities were sold, not least gold, soybeans, corn and sugar


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.

The below summary highlights futures positions and changes made by hedge funds across 24 major commodity futures up until last Tuesday, April 14.

It was a mixed week as the sector reacted to the Fed’s pre-Easter $2.3tn bailout and the failed attempt by OPEC+ to support crude oil amid a historic slump in global demand. The net-long in crude oil and natural gas both rose despite much weaker price action. A strong rally in precious metals and copper following the Fed announcement failed to attract much in terms of fresh longs. Broad-based selling hit the agriculture sector, not least soybean meal, corn and sugar.

Energy: Hedge funds bought crude oil during a historic week in the energy sector. While WTI collapsed by 58% and Brent by 35% the combined net-long rose by 28% to 344k lots, a two months high. The long position in WTI climbed for a third week by one-third to reach 210k lots on a combination of longs (33.6k) and short covering (18.4k). The 22.7k lots buying of Brent to 134k lots was however primarily driven by short covering.

These developments highlights a market where speculators look for lockdowns across to the world to be eased soon and a view that low prices will trigger voluntary and more likely involuntary shut-ins via bankruptcies across the US shale oil patch. That belief however was not shared by the stock market as the market cap in 16 independent oil and gas producers jumped by 7% last week. Something has to give and that will be the key battle over the coming weeks.

US natural gas prices jumped 10% in the week to April 21 as crude oil collapsed. The move in WTI has increased traders confidence that a significant amount of associated gas production will be cut as US crude oil production gets increasingly shut-in. As a result of these speculations the net-long in four Henry Hub deliverable contracts rose by 85% to 99k lots, a one-year high.

Metals: The gold net-long stayed within a 180k to 200k lots range for a fifth week with the oil price collapse and stronger dollar triggering a 10% reduction during the reporting week. The price briefly dipped to $1660/oz last Tuesday before finishing the week on a firmer footing. Having cut their longs by 36% from the February peak hedge funds seems to be looking for a sustained breakout before adding further length. Investors using bullion-backed ETF’s have however continued to accumulate longs with total holdings continuing to reach new highs.

During the past two months silver has seen its net-long being cut by 80% to just 13.5k lots. The combination of the global economic slump towards recession raising the risk of lower industrial demand and its often erratic trading behavior has sapped demand. It’s historical cheapness to gold and the risk of covid-19 related supply disruptions are currently two potential positives.

HG copper buying continued despite a brief risk-off move when oil sank last Tuesday. Focus on a resumption of Chinese demand and supply disruptions has despite the oncoming global recession been supporting a 10% rally and a 65% reduction in the net-short in recent weeks.

The agriculture sector saw a third consecutive week of a broad-based selling. In grains however the combined net short positions in the three major crops continued to track the five-year average. Overall the two commodities seeing most of the selling were corn (-23k lots) and sugar (-15k lots). Both due to their biofuel link to tanking crude oil.

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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