COT: Fund long increasingly skewed towards energy sector

Ole Hansen

Head of Commodity Strategy

Summary:  Futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, June 8. A week where U.S. equities climbed within a whisker of their all-time highs and Treasury yields continued their decline. The dollar traded close to unchanged while the Bloomberg Commodity spot index, led by strong gains in energy, reached a six-year high. In response to these speculators continued their recent rotation out of agriculture and into energy while the dollar short continued to climb


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.

The below summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, June 8. A week where U.S. equities climbed within a whisker of their all-time highs and Treasury yields continued their decline led by lower inflation expectations (breakevens) falling to a five-week low. This after the monthly job report missed expectations, thereby supporting the view the Fed is unlikely to have their hand forced when it comes to the timing of tapering. The dollar traded close to unchanged while the Bloomberg Commodity spot index, led by strong gains in energy, reached a six-year high.

Commodities

The commodity sector saw net buying for a second week, but once again the increase was solely driven by the energy sector with net selling hitting both metals, both precious and industrial as well as agriculture. Overall the combined long across 24 major commodity futures rose 2% to 2.42 million lots, representing a nominal value of $149 billion. Since hitting a record high in the week to May 11 at 2.53 million lots the energy sectors percentage of the total long has risen from 44% to 49%, metals have stayed unchanged at just 9% while the agriculture sector has gone from 47% to 42%.

As mention, most of the buying was concentrated in energy led by natural gas (+31.4k), WTI (+27.9k) and Brent (23.5k) with biggest reductions seen in corn (-14.3k), sugar (-6.1k) and platinum (-4.4k).

Metals: Funds sold gold for the first time in six weeks while copper selling took the net long to near a one-year low and down 73% from the December peak. Platinum was the biggest casualty with the net long being cut by 30% while silver saw a small increase.

Latest update from our Daily Market Quick Take: Gold (XAUUSD) continued lower in Asia with as US real yields and especially the dollar trading higher as the market focus on transient inflation while speculating that the FOMC may strike a more balanced tone at its meeting on Wednesday. Silver (XAGUSD) meanwhile trades near a one-month high against gold after attracting some tailwind from recovering industrial metals. The weekly COT update covering the week to June 8 saw funds sell gold for the first time in six weeks following the loss of momentum. Support at $1856 followed by the 200-day MA at $1840.

Agriculture: On grains the report showed a net 14.5k lots reduction to 543k lots, the lowest bet on rising prices since last September. Despite rallying 6%, the corn long was reduced by 14.3k lots to 275k lots, and since the April peak it has been cut by one-third. Elsewhere wheat and soybeans saw small changes. The softs sector saw reductions led by sugar followed by cocoa and coffee, all three primarily due to fresh short selling.

Energy: The switching of exposure from agriculture to energy primarily benefitted Brent and not least WTI where the net long rose 7% to 410k lots, a near three-year high. Adding Brent, the total crude oil long reached a not yet elevated five-week high at 701k lots. Returning to WTI, the highest close since 2018 above $70 resulted in the long/short ratio hit 14.8, also the highest since 2018.

Latest update from our Daily Market Quick Take: Crude oil (OILUKAUG21 & OILUSJUL21) trades higher led by the WTI which has reached a fresh 32-month high. Driven by buyers switching exposure from metals and agriculture (see below) in the belief rising global demand, forecast by the IEA to reach pre-pandemic levels late next year, and gradual supply increases by OPEC+ will keep the market sufficiently tight to support higher prices. As a result, speculators have increased their combined WTI and Brent long to a five-week high with inflows skewed towards WTI where the net long reached a near three-year high. Brent’s next upside target is $75.6 followed by $78, the downtrend from the 2008 high.

Forex

In forex, and just like the previous week, the flows were with the overall action still skewed towards continued dollar selling. The net short against ten IMM futures and the Dollar Index reached a 13-week high at $18.2 billion after speculators net sold $600 million. Buying of JPY (9.8k), GBP (3.6k) and BRL (16k) being partly offset by selling of AUD (7.5k), CAD (3.5k) and EUR (2.1k)

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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