COT: Heavy gold and crude selling ahead of Middle East tensions spike

Ole Hansen

Head of Commodity Strategy

Summary:  This summary highlights futures positions and changes made by hedge funds across commodities, forex and bonds in the week to last Tuesday, October 10. A week that started on a positive note before ending with a flurry of safe haven demand following Hamas’ attack on Israel. Prior to last Monday’s geopolitical turmoil, stock markets had enjoyed a strong week with Treasury yields and the dollar falling after several Federal Reserved members said surging Treasury yields had reduced the need for additional rate hikes.


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 andforexin the week to last Tuesday, October 10. A week that started on a positive note before ending with a flurry of safe haven demand following Hamas’ attack on Israel. Prior to last Monday’s geopolitical turmoil, stock markets had enjoyed a strong week with Treasury yields and the dollar falling after several Federal Reserved members said surging Treasury yields had reduced the need for additional rate hikes. 

Commodity sector:

The Bloomberg Commodity index fell 1% during the reporting week with a significant amount of weakness early on being only partly offset following Monday’s geopolitical-led bounce in energy and precious metals. As a result, hedge funds sold commodities for a fourth week, led by crude oil, fuel products, gold, and most agriculture commodities, with the few exceptions being natural gas, copper, corn, and sugar. Developments in gold price and positioning ahead of Monday’s spike explain why last week’s rally was mostly about short covering and safe haven demand, and not yet a fundamental change pointing to higher prices in the short-term. 

Crude oil and fuel products: Heavy crude oil selling, which occurred ahead of Monday’s Middle East driven price spike, helped drive a 20% reduction in the WTI and Brent combined long to 422k contracts, a six-week low and the third biggest reduction in more than two years. Longs were cut by 89k while fresh shorts totaled just 14k. Gas oil and RBOB longs meanwhile were both cut by 1/3 while natural gas length jumped in response to a 14.7% rally.
Gold, silver and copper: Position changes in precious metals show how funds were left woefully unprepared for last week’s 5.4% gold rebound. During the reporting week when gold at one point was challenging key support around $1810, the net-short jumped 11.8k to 14.8k contracts to an 11-month high with the bulk being driven by 11k contracts of fresh short positions. The latter helped turbocharged the price response to Middle East tensions as forced a significant amount of short covering. Silver and platinum also sold while copper short covering extended to a second week.
In grains, prices continued to soften ahead of Thursday's WASDE report, the result being another reduction in soybeans length to near neutral (-2.8k to 2.2k) while the wheat short increased by -5.5k to 104.3k. Corn shorts meanwhile were cut by 29% to 113k contracts.
Softs & Livestock: A mixed week in softs with length added to sugar (+6k to 189k), longs were trimmed in cocoa and cotton while sellers increased their coffee net short by 10% to 29.4k.
In forex, the first major dollar correction since July, which saw the Dollar Index fall by 1.2%, did not alter much in terms of positioning. Overall, the dollar long against eight IMM forex futures was reduced by 3% to $10.7 billion, with selling of EUR, GBP, CAD and MXN being offset by demand for CHF, AUD, NZD and not least JPY in response to lower US Treasury yields.
In fixed income, leveraged fund buying of 2s, 10s and not least 30s where partly offset by fresh selling of 5s as well as the 10-yr and 30-yr Ultra contracts. Overall the DV01 value of the total short futures position was reduced by $3m to $408 million per basis point change

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