COT: An under owned commodity sector raising the risk of an upside surprise in 2024 COT: An under owned commodity sector raising the risk of an upside surprise in 2024 COT: An under owned commodity sector raising the risk of an upside surprise in 2024

COT: An under owned commodity sector raising the risk of an upside surprise in 2024

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 last Tuesday, December 5. A week where equities and commodities continued to move in opposite directions with demand worries and a stronger dollar weighing on raw materials while the stock market was supported by a continued decline in bond yields. Since hitting a record high in June 2022, the commodity sector, expect precious metals, have suffered broad declines resulting in the hedge fund long collapsing to levels seen during the Covid-19 crisis in early 2020, highlighting an under owned sector which given the right circumstances may see a strong recovery in 2024

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.

This summary highlights futures positions and changes made by hedge funds across commodities and forex in the week to last Tuesday, December 5. A week where equities and commodities continued to move in opposite directions with demand worries and a stronger dollar weighing on raw materials while the stock market was supported by a continued decline in bond yields, despite stronger than expected US economic data. Speculators reacted to these developments by a surprise reversal of their dollar positions back to a net short while the net long in commodities slumped to a 2020 Covid-19 crisis low, leaving the market increasingly exposed to an upside surprise in 2024.


The commodity sector continued lower during the reporting week with the Bloomberg Commodity Index suffering a 2.4% loss with all sectors, except grains seeing broad declines, led by the energy sector where crude oil prices dropped by more than 5% as Brent and WTI headed for their worst succession of losses since 2018. In fact, just a handful of commodities led by wheat, corn and coffee traded higher on the week.

Overall, these developments saw money managers, which include hedge funds and CTAs (commodity trading advisors), being net sellers of 18 out of the 24 major commodity futures tracked in this report, resulting in the net long position suffering a 22% decline to just 506,000 contracts, the smallest net long since the depth of the Covid-19 crisis back in March and April 2020. Since hitting a record high in June 2022, the Bloomberg Commodity Total Return index has retraced less than 40% of the 130% strong surge between 2020 and 2022. During the same time, the net long position held by speculative traders has collapsed by 82% from a record peak at 2.7 million contracts back in February 2021. 

Since the mentioned price peak in June 2022, most sectors have suffered significant setbacks led by a 52% decline in the energy sector (-17% ex natural gas) with grains and industrial metals both suffering a +23% decline. Against these trends the precious metal sector trades up around 8% while the softs sector remains close to flat.

These developments highlight an increasingly under owned asset class which has struggled in 2023 amid growth worries in China and the wider world, and a sharp rise in funding costs leading industries to reduced excess inventories. It also highlights a sector which given the right circumstances may see a strong recovery in 2024 once the technical and/or fundamental outlook becomes more supportive, thereby leading to fresh buying and short covering from speculators. Drivers that may trigger such a change could be rate cuts lowering the funding costs and with that the inherent contango leading to industry restocking of inventories, OPEC maintaining a tight control of the supply of crude oil, and not least signs of tightness across key commodities that may continue to attract attention. 

An example being the mined metal industry, more specifically copper and other green transformation metals, where a supportive price outlook continues to strengthen. On Friday Anglo American (AAL) slumped 20% after slashing its outlook for copper production in the coming years, citing difficulties at mines in Chile and Peru. Adding to that the recent mine closure in Panama cutting 1.5% of global copper supply, China stimulus expectations supporting demand, and the eventual restocking by industries, and we are likely to see a supportive price outlook into 2024 and beyond.

WTI and Brent continued selling with the comb. net long slumping to 231k contracts, lowest since March 2020 and down 58% from the September 19 peak at 560k contracts. In WTI, the long/short ratio has now collapsed to 1.7 longs per one short, and a level that has triggered a reversal (fresh longs, reduced shorts) on many occasions since 2015.
The correction in gold to $2019 after hitting a record $2135 peak only triggered a small 8% reduction to 133k contracts, the bulk being long liquidation with little appetite for selling the metal short. The silver long was cut by 12% to 22.9k, platinum flipped back to a net short while copper saw a small amount of buying with long and short positions both seeing a reduction.
The biggest corn short since 2020 saw a 22% reduction as prices rallied by 3.6% while a 10% surge in wheat on rising demand from China helped trigger a 20% reduction in the net short to 96k contracts. A halving of the soybean net long to 37k contracts however did not prevent a small weekly increase in the sector long.
In softs, the sugar long was cut by one-third as prices slumped 7.5% as the Indian supply outlook improved. Coffee longs continued to build with short covering driving a 24% increase to an 11-month high at 32k contracts, the cocoa long stayed elevated despite a small reduction while cotton remained close to neutral.
In forex, a third week of aggressive dollar selling, despite broad greenback strength, saw speculators sell $5.1 bn against eight IMM futures, flipping the net back to a short for the first time in three months. The flow was most extreme in sterling (+19.6k contracts & $1.5bn eq.), the euro (9.2k & $1.2bn) and Aussie (13.5k & $0.9bn), though there was also reasonable size buying in the yen (4.3k), Swiss (2.4k), CAD (5.4k), NZD (3.2k), and MXN (8k).

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