COT: Commodities in demand as dollar and real yields drop

Ole Hansen

Head of Commodity Strategy

Summary:  The Commitments of Traders report covering positions held and changes made by money managers in the week to August 4. Appetite for risk during this period remained strong with dollar weakness and rising negative real yields feeding a rise in prices across global asset markets, not least in commodities where gains were led by natural gas, silver and softs. Buying however - as opposed to recent weeks - were not broad based with losses seen in platinum, copper and grains.


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 4. Appetite for risk during this period remained strong with dollar weakness and rising negative real yields feeding a rise in prices across global asset markets. The S&P 500 Index added 2.7% to reach a fresh cycle high while the dollar weakened further against a basket of major currencies. The yield on U.S. ten-year notes dropped 7 bp to 0.50%, thereby supporting a further fall in real yields to a fresh record low at -1.06%.

The Bloomberg Commodity Index rose 3% in the week to August 4 to move above its 200-day moving average while retracing half the January to March sell-off. Gains were led by natural gas (+17.7%), silver (+7.1%), cocoa (7.3%) and coffee (9.6%). In response to these developments, money managers increased bullish bets across the 24 major futures contracts by 10% to a pre-pandemic high at 1.3 million lots.  Buying however - as opposed to recent weeks - were not broad based with losses being concentrated in  platinum group metals (PGM), copper and grains.

Energy: Brent and WTI crude oil managed to attract a small amount of net buying. The combined net long rose by 3.4k lots to 542k lots. This after prices rose to near the top of the recently established range. However, the markets inability in recent weeks to respond positively to rising equity markets and the weaker dollar helped drive an increase in the Brent gross short to 83.8k lots, a 14 week high. 

Speculators increase bullish natural gas bets on four Henry Hub deliverable futures and swap contracts by one-third to 262k lots, a seasonal high going back at least ten years. Hotter than normal weather helping to curb the seasonal stockpile build send natural gas prices soaring during the week by almost 18% to $2/therm.

Energy

Metals: For the second week in a row managed money accounts failed to join the exuberance being exhibited by record flows into ETF's in response to surging gold and silver prices. Both metals witnessed a second week of net-selling, primarily driving by fresh short positions. Most noticeable in silver where funds in a two week period to last Tuesday cut bullish bets by one-third while the metal surged by more than 22%.

The short-term outlook now increasingly points to consolidation with the real rates reversal on Friday sending a warning that no markets – apart from a few U.S. technology stocks, apparently – can continue in a straight line. Gold investors will be watching the dollar, real yields and US-China developments for inspiration, but after adding 250 dollars to the price in just three weeks, the market increasingly needs to consolidate and validate those gains. 

Silver is potentially the most challenged with an overcrowded long in SLV:arcx ETF by equity focused newcomers, many of whom know little about how the metal behaves (strong rallies often followed by deep corrections). Platinum’s failure to join the rally and the gold-silver ratio returning to its long term average close to 70 also adding some short-term headwinds.

In addition, it’s worth mentioning fading support from industrial metals. Not least copper which slumped on Friday after Chile trimmed the 2021 price outlook due to a widening surplus. Ahead of the weakness, speculators had already started to trim their biggest long position in two years. This in response to coppers recent failure to challenge $3/lb and reports that the COVID-19 related impact on supply from South America was not as bad as the market initially had feared.

Precious and industrial metals

Agriculture: The December corn futures return to a lifetime contract low on higher yield forecast and no serious weather threats, helped trigger a 21% increase in the net short to 172,820 lots, still well above the 297,000 lots short seen just two months ago. The bullish conviction held by soybeans speculators continued to be challenged after the price, despite Chinese buying, dropped to a one month low. This after an increase in soybean crop rating raised prospects for another bumper harvest.

Arabica coffee speculators reversed back to a net-long position of 16,418 lots. This after supply concerns in Vietnam, the world’s top producer of Robusta, lifted the price of both varieties. December Arabica coffee last Wednesday surged to resistance at $1.29/lb, the March high and 61.8% retracement of the December to June sell-off. A weaker Brazilian Real however helped trigger profit taking among recently established longs with the price finishing a very volatile week on Friday at $1.1790/lb.

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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