COT: Commodities long liquidation spreads to energy COT: Commodities long liquidation spreads to energy COT: Commodities long liquidation spreads to energy

COT: Commodities long liquidation spreads to energy

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 Tuesday, August 15. A week that saw risk adversity continue to rise in response to China growth and financial risk concerns and signs the Federal Reserve’s fight against inflation is not yet done. Speculators meanwhile maintained an unchanged dollar short position while broad commodities selling led to reductions across all sectors, with selling concentrated in gold, copper, soybeans, corn, and coffee while crude oil was mixed with WTI selling, being partly offset by Brent buying

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities while in forex we use the broader measure called non-commercial.

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 main reasons why we focus primarily on the behavior of speculators, such as hedge funds and trend-following CTA's 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

Do note that this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.

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Commodity weekly: China and FOMC woes weigh 

This summary highlights futures positions and changes made by hedge funds across commodities, forex and bonds in the week to last Tuesday, August 15. A week that saw risk adversity continue to rise in response to China growth and financial risk concerns and signs the Federal Reserve’s fight against inflation is not yet done. Global stocks lost altitude as US bond yields spiked towards fresh cycle highs while the dollar rose. Leveraged fund short selling across the US yield curve saw the long-end short position reach a record high while a near 2% drop in one of the major commodity indices was driven by broad selling across all sectors. 

Commodity sector:

The Bloomberg Commodity index traded lower for a second week as recent selling in metals and agricultural products spread to energy. Overall, it left the index down 1.8% on the week with losses being led by industrial metals (-3.3%) and grains (-3.7%) while emerging consolidation saw the energy sector down 1%. Leverage funds responded to these developments by net selling 16 out of the 24 major commodity futures tracked in this. Overall, the 166k contract reduction in the combined net long to 1.05 million was driven by a 75k contract reduction in the gross long and 90k contract increase in the gross short.

On an individual contract level, selling was concentrated in gold, copper, soybeans, corn, and coffee while crude oil was mixed with WTI selling, being partly offset by Brent buying.

Crude oil and fuel products: The buying of 139k WTI contracts compared with 71k in Brent since the early June rally began, left the WTI mostly exposed to long liquidation as crude went into consolidation mode. Overall, it helps explain the 31k contract reduction in WTI and 20k increase in Brent. The three fuel product contracts held steady with tightness underpinning prices and positioning at or near 18-month highs
Gold, silver and copper: A fourth week of gold selling cut the net long to a five-month low at 46.5k contracts, while the silver and platinum net short positions continued to rise. In copper, two weeks of aggressive selling (-40k contracts) saw the net short jump to 18k contracts, a three-month high.
Grains: The combined grain and soybean long were cut to near neutral at 17k contracts, led by heavy corn and wheat short-selling, and some 100k contracts below the seasonal average for this period.
Softs & Livestock: The coffee short nearly doubled to 27k contracts as the Arabica futures contract slumped 6% on harvest supply pressure. Small gains in sugar and cocoa did not prevent a third week of selling
In forex, the week to August 15 showed a rotation by speculators from CAD and AUD to EUR, CHF, GBP and JPY, but overall the gross dollar short was left close to unchanged at $15.7bn. Biggest IMM currency positions currently held: EUR +160k lots ($21.8bn equivalent), GBP +4k ($4bn) & MXN +82k ($2.4bn) while the biggest short positions are in JPY -81k (-$7bn) and AUD -53k (-$3.5bn)
US bond futures: An across the curve leveraged fund short position is being offset by an equivalent asset manager long. Last week the combined net short in T-Bonds and T-Bonds Ultra reached a record 1.08 million contracts, representing a DV01 of 185 million dollars per one basis-point change in yield

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