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COT: Commodities short-selling on the rise amid China woes and Fed caution

Commodities
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, January 16. A week that saw the market take a raincheck on the timing and pace of future US rate cuts after Fed Governor Waller urged caution. Comments that together with a stronger dollar and China data weakness helped trigger broad selling of commodities, led by grains and metals.

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, January 16. A week that saw the market take a raincheck on the timing, pace, and depth of future US rate cuts after Fed Governor Waller urged caution, pushing back against market bets pointing to six rate cuts this year. Bond yields, especially at the front end of the curve, rose while the dollar continued its January short covering bounce. Commodities meanwhile saw broad selling being led by the grains sector, and hedge funds reacted accordingly with a 40% drop in the net long across 24 major commodities futures being driven by a jump in short bets. 

 

Commodities: 

The Bloomberg Commodity index, which tracks a basket of 24 major futures markets split between energy (30.1%), metals (34.2%) and agriculture (35.7%), traded down 1% on the week as a troubled start to the year continued. All sectors, except softs and livestock traded lower led by grains (-3.1%) and energy (-1.4%), where a 9% slump in natural gas more than offset small US cold weather-related gains in fuel products while crude oil remained stuck within its established range. 


The grain sector remains under pressure from improved crop weather in Brazil, adding to the risk of a large carryout this summer after recent stock upgrades saw soybean futures drop to their lowest level in more than two years and corn futures set a three-year low. Responding to these developments speculators now hold a net short position across all six soy and grains futures, the extent to which has only been seen once before since at least 2006. In the week to January 16, the last remaining long position in soymeal also flipped to a net short. Overall, the near 500,000 contract net short represents a nominal value of $15 billion.

Overall developments that saw net long futures position held hedge funds and CTA’s extend their recent slump to an August 2019 low at 151.5k contracts, representing a nominal value of $43 billion, and the weakest position held at the start of any year since 2015. Net selling was seen in 16 out of 24 contracts with the grains sector once again seeing the bulk with all metals, both precious and industrial also seeing net sales. In nominal terms the selling was led by soybeans, WTI crude oil, gold and copper with buyers focusing on Brent crude and natural gas. 

Energy: Selling of WTI offset buying of Brent leaving the net nearly unchanged while only slight changes were seen among the fuel products. A 33k contract buying of natural gas was mostly driven by short covering as the price dropped by 9%.
Metals: Broad selling across the sector as the dollar strengthened and traders dialed back the timing of the first US rate cut. China growth concerns drove a 51% jump in the copper short to an 18-month high, while the platinum long was extinguished.
Grains: Speculators were net sellers for a fifth week, driving the net short to a May 2019 high near 500,000 contracts, with corn representing more than half at 261k followed by soybeans (-77k) and CBT wheat (-69k).
In softs, the sugar long dropped to a 14-month low, the Arabica coffee long reached a fresh 17-month high while a renewed cocoa price spike and a recovering cotton both attracted demand..
In forex, the flows were broadly skewed towards dollar buying as the DXY continued its January bounce amid rising Treasury yields and reduced bets on a March rate cut. Overall, the speculative dollar short vs eight IMM futures and DXY was reduced by 23% to $9.1 bn. Selling being led by EUR and AUD, and only partly offset by demand for GBP

Commodity articles:

19 Jan 2024: Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
16 Jan 2024: Data dependent precious metals continue their bumpy ride
12 Jan 2024: Commodity Weekly: Geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: Video - Investing in Uranium
1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
16 Nov 2023: Podcast: Silver comeback, watch OPEC as crude oil slides lower
16 Nov 2023: Crude oil weakness adds focus to upcoming OPEC meeting
15 Nov 2023: Soft CPI lifts gold and beaten down silver and platinum
12 Nov 2023: Copper supported by green transformation demand and peak rate speculation 
10 Nov 2023: Commodity weekly: Crude oil risks overshooting the downside

Previous "Commitment of Traders" articles

15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand

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