COT Report: Broad risk reduction seen ahead of easing trade tensions

Commodities:

Despite the Bloomberg Commodities Index—tracking a basket of 24 major commodity futures, all of which are covered in this update—trading unchanged during the latest COT reporting week to 6 May, this did not prevent additional selling and risk reduction from managed money accounts. Many of these had been left bruised by a month-long, tariff-driven rollercoaster, which had lifted volatility, thereby forcing traders to hold smaller positions.

In other words, the latest update highlights positioning ahead of a period that saw easing trade tensions, culminating today with the United States and China agreeing to temporarily lower tariffs on each other’s products—a reflection of the punishing impact 100%+ tariffs have had on both countries’ ability to export goods in recent weeks. This development has raised concerns about an economic slowdown in both economies, and worries in the White House about television coverage from the United States ending up showing empty shelves.

Initial reaction to the tariff reduction news

The procyclical sectors of industrial metals—and not least energy—rose strongly on the news, while gold’s safe-haven status left it exposed to profit-taking amid a stronger USD and rising US Treasury yields. This was further compounded by a ceasefire between Pakistan and India that seems to be holding, and Ukraine challenging President Putin to engage in talks this week. Crude oil, recently under pressure from an OPEC+ production hike, has initially emerged as the biggest winner, with the news helping to stabilise the demand outlook.

Elsewhere, soybeans—the hardest-hit crop in the US–China standoff—are trading higher, while corn and wheat continue to struggle amid weak exports and favourable planting conditions across the US Plains. However, an expanded Brazilian soybean acreage and the upcoming corn harvest may limit upside potential for now.

In gold, the key levels of support to look out for are USD 3,200 followed by USD 3,165—the pre-Liberation Day high and the 0.618 Fibonacci retracement of the recent USD 540 rally. The two crude oil futures, meanwhile, have recently been settling into wide 10-dollar ranges, with resistance for now looking firm at USD 65 and USD 69 respectively in WTI and Brent.

Broad risk reduction seen ahead of easing trade tensions

Close to two-thirds of the 27 major commodity futures contracts tracked in this update saw net selling from hedge funds during the week to 6 May, led by crude oil, diesel, gold, soybeans, corn, and sugar, while buyers focused on natural gas, copper, CBOT wheat, and livestock.

Energy: Selling of WTI and Brent extended to a second week, lowering the combined net long by 16% to a near six-month low at 191k contracts, while both the London- and New York-traded diesel contracts saw their net short positions double—both to around 20k contracts.

Metals: Gold selling, albeit moderate, extended to a seventh consecutive week, leaving the net long at a fresh 14-month low of 112k contracts—a 56% reduction since September’s peak above 250k contracts—and highlighting the importance of buyers in Asia and central banks in preventing the yellow metal from seeing a deeper correction. Light activity was seen in the other metals with silver and platinum seeing net selling, copper was bought for a fifth week while the palladium short was cut by 10%. 

Agriculture: Except for CBOT wheat, the grains sector was exposed to broad selling, led by soybeans and, not least, corn, which drove a reduction in the net long from a near two-year high in February back to neutral. It is also worth noting an ongoing divergence between soybean oil, which has risen 23.5% this year, and soybean meal, which has slumped by 10%—reflecting strong demand for biofuels, especially in Brazil, following a decision to raise the biodiesel blending mandate from 14% to 15% in March. The heightened demand for soybean oil has incentivised processors to increase soybean crushing activities to extract more oil, inadvertently leading to an oversupply of soybean meal, the co-product of this process. These developments have driven a sharp divergence in positioning between the two, with hedge funds currently holding a record short position in the soymeal contract.