COT: Funds cut commodity exposure amid virus-led demand shock

Ole Hansen

Head of Commodity Strategy

Summary:  Hedge funds resumed their broad-based selling of commodities in the week to February 25. The only three noticeable exceptions being soybeans, sugar and not least crude oil. The reporting period just caught the front end of a week that turned out to be one of the worst in financial markets since the 2008 global financial crisis. As volatility spiked, deleveraging from margin traded funds tracking a certain level of volatility kicked in. It left all elevated positions, such as gold, at risk of a correction


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.

The below summary highlights futures positions and changes made by hedge funds across 24 major commodity futures up until last Tuesday, February 25. A reporting period that just caught the front end of a week that turned out to be one of the worst in financial markets since the 2008 global financial crisis.

As volatility spiked, deleveraging from margin traded funds tracking a certain level of volatility kicked in. It left all elevated positions, both long and short, at risk of a correction. The most noticeable being gold which despite a very supportive backdrop experienced its biggest one-day plunge on Friday since 2013.

As the table shows hedge funds resumed their broad-based selling during the reporting week. The only three noticeable exceptions being soybeans, sugar and not least crude oil. By Friday the shock waves from a worsening virus crisis had driven the Bloomberg Commodity Index down by 7%. A global drop in consumer confidence, behavior and spending may add pressure at a time where companies are already under pressure from broken supply lines as China, the world’s production center of everything, struggles to get back to work.

The Port of Los Angeles a key hub for trade with Asia is projecting a 25% drop in container volumes this months. China’s official PMI index fell to a record low 35.7 in February, highlighting the damage from the coronavirus outbreak on the world’s second-largest economy already challenged by the trade war with the U.S. With these developments in mind the markets will once again look to central banks and government for support. The expectations for future rate cuts have surged with the market currently pricing in an imminent U.S. rate with another two to follow before June. 

The continued sell-off in crude oil, which accelerated after last Tuesday, attracted the first week of profit taking in five. The 33k lots increase in the Brent and WTI net-long was primarily driven by a 30.5k lots reduction in the gross-short. Selling in natural gas resumed just before the price slumped to a fresh four-year low on Friday at $1.684/MMBtu.

The gold net-long increased again but only by a surprisingly small fraction. Perhaps a sign that leverage funds, in response to a near doubling of the VIX to 28% last Tuesday, had already begun cutting exposure ahead of the carnage that followed.  Silver longs were cut by 8% after hitting a 30-month high the previous week. This before the white metal suffered its biggest weekly loss in 7 years and the cost of one ounce of gold jumped to 95.5 ounces of silver, a 30-year high.  The HG Copper net-short was cut to a three week low as the industrial metal benchmark managed to maintain support above the crucial $2.5/lb area.

Heavy selling hit wheat with the net-long being cut by 35% after reaching a 19-month high the previous week. Tight supply sugar and cocoa saw continued buying despite the emerging risk of profit taking. 

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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