COT: Broad commodity buying led by oil, copper and wheat

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, July 27. A week where continued risk appetite lifted global stocks while bond yields held steady after hitting a five month low. Specs increased bullish dollar bets despite emerging profit taking after the greenback reached its highest level since April. Commodities jumped with the Bloomberg Spot index adding 2.7% to record another 10-year high led by futures contracts focusing on energy and softs


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, July 27. A week where continued risk appetite lifted global stocks, with China being a major exception due to a regulatory clampdown. Bond yields held steady after hitting a five month low while some profit helped arrest a dollar rally which had seen the greenback reach its highest level since April. Commodities jumped with the Bloomberg Spot index adding 2.7% to record another 10-year high led by futures contracts focusing on energy and softs.

Commodities

The Bloomberg Spot index reached a fresh ten year high thereby supporting an 8% increase in the combined net long held by funds across 24 major commodity futures. Outside precious metals and PGM’s which were all sold, the buying was broad with the net 160k lots increase to 2.2 million being led by crude oil (54k lots), HG copper (17k) and sugar (31.6k) with cattle (14k) and wheat (11k) also seeing solid buying interest.

Energy:  Buyers rebuilt crude oil longs following the early July correction where the net length in WTI and Brent, despite prices at a decade high, was cut to the lowest since last November. In WTI an increase in both long (+16k) and short (+11.7) positions left the net up just 1%, Brent saw a 19% jump on a combination of fresh longs (+34k) and short positions (-15.6k) being scaled back.

Crude oil futures have given back some of last week's gains today in response to weaker China data and continued worries about the spreading of the delta coronavirus variant. The market meanwhile is also watching rising tensions between the U.S. and Iran as Washington on Sunday warned about an “appropriate response” after blaming Tehran for last week’s drone attack on an Israel-linked oil tanker. Brent crude oil has settled into a range around $75 with Delta related demand worries offsetting the current tight supply outlook. Focus this week on Iran developments and EIA’s weekly stock report with Cushing levels currently trailing the five-year average by close to 30%.

 

Metals: Three weeks of net gold accumulation reversed during the week with speculators cutting their net long by 4% to 106k lots. Both long and short positions were reduced on a combination of the summer holiday sapping interest and probably more important, gold’s inability to respond favorably to the month-long decline in U.S. Treasury yields, both nominal and especially important for gold, real yields. A continued rally in stocks, the recent dollar rally and investors accepting central banks transitory message on inflation have all resulted in reduced demand for gold.

Silver meanwhile have struggled even more with the XAUXAG ratio briefly touching a six-month low last week, thereby supporting a further reduction in bullish silver bets by 19% to just 21k lots, a 14-month low.

Copper’s renewed bid which during the week helped drive it higher by 6.6% and above its recent $4.2 to $4.4 range attracted fresh buying with the net long jumping 58% to 46k lots, still half the maximum exposure seen during the past year. Flooding in China and Europe raising demand for reconstruction and a softer dollar, some of the main drivers behind the renewed pickup in demand.

Gold remains stuck near $1800 following an end of week roller-coaster which saw the metal reverse sharply lower after once again finding resistance and thereby creating a double top at $1833, the 50% retracement of the June sell-off.  Having just returned from my summer holiday, the first thing that springs to my mind is golds disappointed performance following its inability to respond positively to the July collapse in US 10-year real yields to a record low. Overall, the metal remains stuck in a 40-dollar range with a continued recovery in silver from a recent six-month low against gold needed to support precious metals in general.

Agriculture: July was a month that saw massive weather related disruptions around the world with flooding in Germany and China, extreme heat in parts of the U.S. and Canada as well as frost in a key coffee growing region in Brazil all attracting some attention. Despite of these developments, the Bloomberg Agriculture Spot index ended July down by 1% with gains in coffee and wheat being offset by losses in corn and soybeans.

Returning to the reporting week, the grains sector witnessed a second week of net buying following almost 3 months of continued selling during which time the combined net long in corn, soybeans and wheat was cut by 53%. Last week most of the buying interest was concentrated in wheat after speculators once again flipped their CBOT wheat position back to a net long.

One of the biggest surprises, in terms of investor response to market developments, was seen in Arabica coffee, where the price jumped by 21% rally to a seven-year high above $2/lb on Brazil frost worries. Instead of attracting fresh momentum longs the surging volatility instead helped force a reduction in both long and short positions, leaving the net down 2% at 38.4k lots on the week.

Forex

Despite trading lower on the week, speculators bought dollars for a sixth week to July 27, thereby extending their net long against ten IMM currency futures and the Dollar Index to a fresh 17-month high at $4.4 billion. All majors with the exception of the Swiss Franc were sold, led by euro which saw its net long drop by 7,7k lots to 38.1k, also a 17-month low. The biggest short positions against the greenback are currently Japanese yen at 60k lots or $6.8 billion equivalent followed by a 39.3k lots short in Australian dollars, the equivalent of $3.7 billion. 

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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