COT: Commodity selling accelerates; dollar longs ease despite elevated euro and Aussie shorts

Commodities

The latest COT report on commodities, covering the week to 27 October, showed an acceleration and broadening of speculative selling, with managed money accounts recording net selling for a seventh consecutive week. During the reporting period, a relatively modest 0.9% decline in the Bloomberg Commodity Index coincided with net selling across 22 of the 25 major commodity futures tracked, leaving no sector unscathed.

Overall, the combined net long position fell by 22% to 1.18 million contracts, with the largest reductions seen in natural gas, gasoil, soybeans, corn, wheat and sugar. The widespread selling highlights a continued deterioration in speculative sentiment, with position reductions extending well beyond the markets experiencing the greatest price weakness. It also suggests that leveraged traders have increasingly focused on reducing overall exposure rather than simply rotating between sectors.

Interestingly, despite a major rotation over the past couple of months out of metals and agriculture and into a surging energy sector, excluding natural gas, speculative positioning in energy has not followed prices higher. The combined net long across the six major crude oil and refined fuel futures contracts has instead seen a 5% decline to 519,000 contracts, highlighting the difficulties leveraged accounts have faced navigating volatile, and at times headline-driven, markets.

While the Brent front-month contract reached a six-month high last week, hedge funds held a combined net long in Brent and WTI of 350,000 contracts, some 27% below the level recorded six months earlier. This divergence between rising prices and reduced speculative length suggests that the rally has been driven less by fresh speculative buying and more by underlying supply concerns, physical market tightness and geopolitical risk. It also highlights a degree of caution among leveraged traders, who remain exposed to sudden price reversals on signs of diplomatic progress in the Middle East.

What stood out:

• Natural gas: The combined net short across the two major Henry Hub futures contracts surged to 193,000 contracts, a six-year high. Persistent price weakness has encouraged further short selling, leaving positioning increasingly one-sided and potentially vulnerable to a sharp reversal should colder weather or stronger demand alter the supply outlook.
• Silver: The net long position was cut to just 3,000 contracts, a 2½-year low, highlighting the deterioration in speculative sentiment as silver continued to underperform gold. The reduction leaves relatively little speculative length to liquidate, although fresh short selling remains a risk.
• Palladium: The net short position rose to 13,500 contracts, an 18-month high, reflecting continued bearish sentiment towards the metal amid concerns about longer-term automotive demand and substitution.
• Lean hogs: The net short position reached an all-time high of 47,000 contracts, highlighting the extent of the bearish positioning. Such an extreme leaves the market vulnerable to short covering should fundamentals or price momentum begin to improve.
• Sugar: Having recently reached a five-year high, the speculative net long was cut by 11% to a still-elevated 240,000 contracts. The sharp post-election decline in the Brazilian real encouraged long liquidation by improving the competitiveness of Brazilian exports and raising expectations of increased producer selling. With positioning still elevated, the market remains sensitive to further currency-driven adjustments.
• Grains: In just six weeks, the combined net long across six major grain and oilseed futures contracts has plunged by 61% from a record high to 391,000 contracts, highlighting the speed and scale of the recent speculative liquidation. The reversal reflects a combination of easing supply concerns, changing price momentum and broader risk reduction, with previously crowded long positions particularly exposed to liquidation.

Overall, the latest positioning data point to a market increasingly characterised by defensive positioning and reduced risk appetite. While geopolitical supply risks continue to support parts of the energy complex, speculative investors have been reluctant to add exposure, while previously crowded positions across agriculture and metals continue to unwind. The speed of the reduction also raises the prospect of sharper price reactions should sentiment or underlying fundamentals begin to stabilise.

As always, COT data capture positioning in the futures market rather than the broader physical commodity market. Nevertheless, the report provides a useful indication of speculative risk appetite and the potential for positioning-driven price movements.

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, covering positions held as of the previous Tuesday. The reports break down open interest in futures markets into different categories of market participants, depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap Dealers, Managed Money, and Other Reportables
Financials: Dealer/Intermediary, Asset Manager/Institutional, Leveraged Funds, and Other Reportables
Forex: A broader breakdown between commercial and non-commercial participants, with the latter generally viewed as speculators

The main reasons we focus primarily on the behaviour of speculators, such as hedge funds and trend-following CTAs, are:

• They are more likely to have tight stops and no underlying physical exposure that needs to be hedged
• This makes them more reactive to changes in fundamental or technical price developments
• Their positioning provides insight into major trends, while extreme positions can also help identify when a reversal or correction may be looming

It is worth noting that this group tends to anticipate, accelerate and amplify price moves that have often already been set in motion by fundamentals. As followers of momentum, these traders typically buy into strength and sell into weakness. As a result, they are often found holding their largest long exposure near the peak of a cycle or their largest short exposure ahead of a trough in the market. For that reason, positioning extremes can be useful contrarian indicators, but rarely in isolation: timing still depends on a fundamental or technical catalyst that changes the prevailing trend.