COMMODITIES 5 minutes to read

COT: Reversal risk looms as funds cut commodity exposure

Ole Hansen

Head of Commodity Strategy

Summary:  Hedge funds and money managers continue to slash bullish commodity bets.


Saxo Bank publishes two 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.

To download your copy of the Commitment of Traders: Commodity report for the week ending May 15, click here.

Hedge funds kept up the selling pressure across key commodities during the week to May 14. Fears of the trade war leading to lower growth, demand concerns and ample stocks of several key agriculture commodities have been the main drivers behind the current slump. The one-third reduction last week reduced the net-long to just 147k lots, the lowest since January 2016. 

The agriculture sector remains the hardest hit with short positions being held in all but a couple of livestock contracts. Bullish bets are concentrated in crude oil and products due to tightening supply and raised concerns about the stability in the Middle East. Gold, meanwhile, was left exposed after the failed break above $1,300/oz attracted the largest amount of buying since December. 

Note: See page 3 in the attached report for detailed descriptions of the different data points in the report.
The combined long in WTI and Brent crude oil was cut for a third week with the reduction once again primarily concentrated in WTI. Rising US stocks and production have provided a less solid foundation than Brent, the global benchmark, which is being supported by voluntarily and involuntary production cuts from the Opec+ group of nations.

The Brent forward curve indicates the tightest market in five years and short-sellers have responded by staying firmly on the sidelines throughout the recent price correction. 
Gold has once again been left exposed to long liquidation following the failed attempt to break above $1,300/oz last week. Hedge funds have, like most others, been struggling to work out the direction for gold with geopolitical tensions and a worsening trade war between China and the US having so failed to generate enough safe-haven demand to trigger a renewed push to the upside. Last week was no exception when the biggest one-week buying spree since early December led to a two-day sell-off in response to recovering stocks and dollar buying reducing the need for protection and safe-haven demand.

Interest for silver remains muted as can be seen in its performance both against the dollar but also against gold. The XAUXAG ratio remains stuck at multi-decade high with the main source of demand from financial investors currently benefiting gold the most amidst focus on safe-haven allotment and growth concerns. The lack of interest was on display last week with the net-short hardly changing while funds rushed into gold. 

Funds sold HG copper for a fifth consecutive week with the net-short hitting a 15-week low of 35k lots. This came in response to recent price weakness driven by worries that trade tensions could weigh on the outlook for demand. Platinum’s recent strong run, both against the dollar but also against gold, also continues to run out of steam. Last week the net-long was cut 27% to 13k lots, a six-week low. 

The grains sector was mixed last week with the soybeans net-short continuing to expand; corn selling slowed while CBOT wheat was bought for a second week. Wet weather planting delays across the US Midwest have triggered short-covering in both corn and wheat. The combination of the risk of lower acreage and lower production, combined with a major short position, has been a potent cocktail for corn, which last week ended up posting its best weekly performance since 2015. 

Note: The USDA publishes its “Planting Progress” reports on Mondays at 20:00 GMT.

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

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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