COT: Trade war rattles commodities

Ole Hansen

Head of Commodity Strategy, Saxo Bank Group
Ole Hansen joined Saxo in 2008 and has been Head of Commodity Strategy since 2010. He focuses on delivering strategies and analyses of the global commodity markets defined by fundamentals, market sentiment and technical developments.

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Following a relatively quiet week where commodities had been reacting to the upcoming Opec meeting in Vienna, a US rate hike, a dovish ECB and a stronger dollar, pandemonium hit the market on Friday. This occurred after the US and China both increased the risk of a full blown trade war between the world’s two biggest economies. The risk to global growth and US exports of goods from soybeans and corn to crude oil helped send commodities sharply lower on Friday (table below shows Friday’s performance).

This week’s COT update  reflects the changes that took place up until last Tuesday, June 12, and therefore provides a guide to which commodities were most exposed last Friday.  Hedge funds bought metals while turning into heavy sellers of grains during the week. The energy sector was mixed with buyers returning to crude oil while continuing to reduce fuel longs.

Following seven weeks of net-selling and after cutting bullish bets by 27% hedge funds dipped their toes back into crude oil last week. New longs were added especially in Brent crude after it increasingly became clear that the upcoming Opec and non-Opec meetings in Vienna on June 22 and 23 was going to result in a clash between the Saudi/Russia block calling for an increase against those being opposed led by Iran, Iraq and Venezuela. 

The +3% price collapse on Friday would have cut longs further as the market worried about the risk of China applying tariffs on imports of crude oil and gasoline from the US. 

Improved US weather and worries about the impact of Chinese countermeasures against US tariffs hurt the two key crops of soybeans and corn. Overall the grains sector witnessed the biggest weekly reduction since March 2017. The net-long more than halved to just of 141k lots compared with 454k lots just five weeks ago.

Silver experienced a crazy week with the net-long rising more than eight-fold up until last Tuesday. This was the fastest speculative accumulation since 2010 and helped amplify the biggest drop on Friday in more than 18 months when general risk aversion hit the commodity space on US-China trade war escalation. Gold’s robustness around $1300 led to an 11% increase in the net-short before it  got hit hard on Friday, just like silver

The HG copper long jumped by 59% to a five-month high as strike threats in Chile threatened supply. However, the combination of weaker economic data from China (retail sales, industrial production and credit growth) together with Friday’s tariffs announcements, all left the metal exposed to renewed selling.

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