COT: Brent bulls yield to increased recession risks
Head of Commodity Strategy
Summary: Hedge funds maintained an overall unchanged commodity exposure – measured in number of futures contracts – during the week to May 28. But the sector wasn’t unaffected by increased global growth worries.
To download your copy of the Commitment of Traders: Commodity report for the week ending May 28, click here.
These fears meant that growth-dependent commodities such as energy and industrial metals saw end-of-month selling. This was offset by another week of heavy short-covering of key crops due to ongoing weather problems in the US.
Renewed strength in precious metals could potentially benefit silver the most after funds increased the net-short to 39k lots, a seven-month high. One of the reason why silver has struggled and reached the cheapest level versus gold (XAUXAG last at 89.7 ounces of silver to one ounce of gold) is the increased risk of recession. Historically silver has struggled against gold during such times given that 50% of its demand is from industrial applications. However, as mentioned, further gold upside is likely attract short-covering and a potential period of outperformance.
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.