Head of Commodity Strategy
Summary: The COT report covering the week to January 14 showed the hedge funds reaction to Middle East deescalation with crude oil and gold longs being cut. The imminent signing of the U.S. - China trade deal meanwhile helped drive demand for industrial metals and agriculture commodities.
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 Commitments of Traders report covering the week to January 14 found speculators cutting longs in crude oil and safe haven metals as Middle East tensions faded. Natural gas continued to get sold while agriculture commodities got bought ahead of the signing of the U.S. - China trade deal.
Crude oil longs were left exposed following the pump and subsequent dump as Middle East tensions faded and after some longs established following the December 6 OPEC+ meeting became loss making. The selling was concentrated in WTI which saw the net-long being cut by -22% as domestic stocks rose. Brent crude oil, the global benchmark, was despite the 5.5% price slump, surprisingly left unchanged at 426k lots. Overall and due to the drop in WTI longs the combined position dropped to 652k lots, a five-week low.
The already record short in natural gas expanded further by 7% to 267k lots as winter demand stayed muted and the price drifted lower towards $2/therm. Today (Monday) the price rout continued as the price initially slumped by 9% in early trading to reach $1.83/therm, another seasonal record low, before clawing back half those losses. The lack of frigid cold weather this winter have seen producers being unable to shake off a supply glut amid rising production. With the winter soon giving way to spring the market is already beginning to worry about the prospect for storage facilities hitting max during the summer injection season.
Speculators reduced bullish gold bets by 4% to 262k lots in response to the correction that followed the temporary early January surge above $1600/oz. The silver net-long was kept unchanged at 58k lots.
Chinese New Year celebration start this Friday and will keep Chinese markets more or less shut until January 30. The lack of activity in China may lead to relative quiet markets during that time
Bullish platinum bets hit a new record at 51k lots as the metal benefited from the continued surge in palladium. HG copper longs meanwhile jumped in response to Chinese data and ahead of the signing of the US-China trade deal.
The agriculture sector was also in demand ahead of the signing of the trade deal with 11 out of 13 commodities tracked in this being bought. The net-long across the sector jumped by 88k lots to 327k lots, an 18 month high. Biggest change was the 64k lots or five-fold increase in the sugar net-long to a 14 month high while cotton and KBT Wheat longs both reached 13 month highs
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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