COT: Funds exit commodity longs on demand concerns

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.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992