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COT: Commodity specs jump ship on recession angst

Ole Hansen

Head of Commodity Strategy

Summary:  Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities and forex during the week to June 21. A week where central bank rate hikes and weak economic data helped drive the market focus towards the risk of recession, and with that worries about demand for key commodities. Developments that helped trigger long liquidation in energy and grains together with additional short selling in copper. Precious metals meanwhile attracted fresh buying after the dollar and bond yields both dropped


Saxo Bank publishes 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 hedge funds across commodities and forex during the week to June 21. A week that followed the post-FOMC rate hike and weaker than expected economic data helped steer the market focus towards the looming risk of an economic slowdown, and in a worst-case recession. The result of these worries being a sharp reversal in US ten-year treasury yields and a weaker dollar both after hitting multi-year highs. 

Worries about growth and with that demand for commodities helped trigger long liquidation in energy and grains together with additional short selling in copper. Precious metals meanwhile attracted buyers in response to the weakness mentioned in yields and the dollar. 

Commodities
The commodity sector extended its decline during the reporting week with Bloomberg Commodity Spot index declining 2.1% with losses led by energy and the grain sectors. 

Overall, the total net long across the 24 commodity futures tracked in this slipped 5% to a 22-month low at 1.5 million lots, with the biggest reductions seen in WTI crude oil, natural gas, grains and sugar. 

Note, the table below does not include delayed data from the ICE Europe Exchange on Brent and Gas oil

Energy: WTI crude oil sold off nearly 6% during the week to June 21 and in response Managed Money accounts liquidated 29k lots of net longs ($3.5 billion notional). It was the biggest week of long liquidation since last November and it reduced the net long to a 26-month low at 234k lots. Small reductions were seen in diesel and gasoline while the natural gas long across four Henry Hub deliverable futures and swap contracts slumped 44% to 19k lots, and lowest since March 2020.

Metals: Gold and silver accounted for the bulk of the net buying across the commodity sector last week as recession worries helped boost prices. Aggressive selling the previous week was reversed with the gold net long rising 25% to 61.8k lots and silver 333% to 6k lots, both primarily driven by short covering. The HG copper net short more than doubled to 16k lots just before the price broke below $3.95 per pound, a key level that had been providing support for the past 15 months. 

Agriculture: The grains sector saw broad selling after the Bloomberg Grains Index dropped 5% to a four-month low. Net selling of all three major crops drove the combined long across the six contracts tracked in this down by 32k lots to 567k lots, a five-month low, and down 31% from the April peak. In softs, sugar selling extended to a fourth week with the net long declining by 20k to 116.5k lots. Cotton, a recession-shy contract, saw long liquidation after falling by 5.6%. In the days that followed last Tuesday the December contract lost another 15%, which undoubtedly would have hurt a market which for many weeks had a very elevated long-short ratio, most recently at 27 longs per each short. A situation that often triggers outsized reactions to a change in the prevailing trend, in this case given the lack of short positions to meet the pressure from longs trying to get out. 

Forex
Broad dollar weakness following the +3% jump the previous week slowed but did not stop continued speculative dollar accumulation in the week to June 21. Once again led by continued shorting of euros, albeit at a much slower pace than the record pace recorded in the previous week. In addition, long liquidation of recently established CAD longs helped offset small buying of NZD, AUD, GBP and not least JPY, the latter seeing short covering extend to a sixth week. Despite hitting a multi decade high speculators have become wary of the yen’s rapid demise and with bond yield spreads narrowing as recession fears sink yields elsewhere, the risk of further yen strength has so far led to a 47% reduction in the net short to 58k lots, a 15-week low.

Overall, these changes saw the dollar long against ten IMM futures rise by 8% to $20.3 billion, a four-week high.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • 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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