Head of Commodity Strategy
Summary: Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities and forex during the week to Tuesday, March 21. The second week of banking and liquidity stress saw the dollar and yields trade softer while money managers dumped crude oil at the fastest pace in a decade with the WTI long plunging to a seven-year low. Gold buying continued although some hesitancy emegerge around $2000 while net short positions were maintained in silver and copper.
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 reasons why we focus primarily on the behavior of the highlighted groups are:
This summary highlights futures positions and changes made by hedge funds across commodities and forex during the week to last Tuesday, March 21. A week that encapsulated the market’s response to a second week of turmoil across the banking sector, including last weekend’s Credit Suisse meltdown and subsequent takeover by UBS. Ahead of Wednesday’s 25 basis point rate hike, the stock market traded higher led by the Nasdaq as investors took shelter among the mega cap technology stocks, bond yields traded softer, Bitcoin was up 14% while the dollar traded a tad softer.
Up until the Silicon Valley Bank collapse on March 9 and the subsequent liquidity crisis hurting banking stocks, hedge funds had been holding onto a sizable long position in crude oil, not least Brent. Buyers had been attracted to the backwardated curve structure and as volatility dropped from 47% last November to a 32% low at the beginning of March, they had increased positions accordingly. These developments help explain the aggressive nature of the selling that followed once support was broken and volatility began spiking towards the 61% level seen currently.
During a two-week period to March 21, hedge funds sold WTI and Brent at the fastest pace in more than ten years with the combined net long slumping by 233k lots or 233 million barrels of crude oil to a three-year low at 241k lots. Selling hit WTI particularly hard with net long slumping to 71k lots and lowest since 2016.
The mentioned selling of crude oil and the three major product futures has reduced the combined net long to 310k lots, a three-year low, and down 50% since mid-January when China reopening demand was the focus.
Gold and silver traders have spent the past few weeks scrambling to rebuild positions that was sharply reduced during the February correction, when Fed Chair Powell’s comment about combating inflation at whatever cost drove expectations for a sharply higher terminal fed funds rate. The SVB collapse changed that completely and the subsequent collapse in yields and expectations the next move in rates will be a cut helped propel precious metals sharply higher, thereby supporting fresh buying from hedge funds in futures and investors in ETF’s.
While total holdings in ETFs have seen their first back-to-back weekly increase in more than a year, hedge funds have in just two weeks reversed most of the selling that occurred during the previous four. Compared with the last time gold traded at $2000 last year in March, the 107k lots net long is 40% below the length held back then, highlighting the prospect for more buying should the technical and fundamental outlook continue to support. For now, however, it is worth noting that the bulk of the buying in the latest reporting week to March 21 was primarily driven by short covering as speculators had second thoughts about adding length above $2000. Potentially driven by the wide margin between the market's belief in rate cuts and the no-change stance being signaled by the Fed.
The silver net only managed a return to neutral with 20k lots of buying in the past two weeks, being less than half the 43k lots sold during the previous five. The China recovery focus at the start of the year saw the HG copper net long reach an 11-month high on January 24 at 41k lots before collapsing to a 7k short in the latest reporting week. Just like the price correction has failed to deal a blow to the overall bullish outlook for copper it is worth noting that the reduction seen during the past couple months has primarily been driven by long liquidation (-41k lots) while the appetite for short selling (+7k) has been relatively muted.
With so much going on in metals and energy we will give the agriculture sector a bigger focus in next week’s update. We do note, however, that the 75k lots of net selling during the lates reporting week reduced the combined exposure to 339k lots, lowest since August 2020 and down 74% from the post-Ukraine invasion peak. The reductions last week were driven by the soybean complex, cotton and livestock while wheat and corn were bought, the latter after funds in the previous four weeks sold a record 289k lots, thereby flipping the position to a net short for the first time since August 2020.
In forex the main theme was an overriding level uncertainty regarding the short-term direction of the dollar and other major currencies as the banking crisis continued to unfold. The result being a very mixed performances which overall left the Dollar index small down on the week. Overall, the gross dollar short against nine IMM currency futures was cut by 19% to $3.8 billion, a four-month low. Buying of EUR, JPY and CHF being offset by selling of others, not least the biggest week of CAD selling since late 2018 lifting the net short to a four-year high at 57k lots.
However, looking underneath the bonnet we find a market where speculators mostly focused on reducing their overall exposure with selling of both longs ($6 billion equivalent) and shorts ($5.1 billion) resulting in the mentioned reduction in the overall dollar short.
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