COT: Speculators sell into overheated commodity market

Ole Hansen

Head of Commodity Strategy

Summary:  Futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, May 11. A week where renewed inflation fears ahead of U.S. CPI pushed the S&P 500 to a one-month low, the dollar lower and US 10-year breakeven yields to a fresh multi year high. The commodity sector which reached a ten-year high saw emerging buying fatigue as money managers sold into the rally, especially in some of 'hot' commodities such as corn and copper.


Saxo Bank publishes 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 and attached report highlight futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, May 11. A week where renewed inflation fears ahead of Wednesday’s U.S. CPI pushed the S&P 500 and the interest rate sensitive Nasdaq to one-month lows. Slightly higher ten-year Treasury yields meanwhile disguised a precious metal friendly drop in real yields as breakevens jumped to a fresh eight-year high at 2.54%. Commodities surged higher with broad gains in metals and agriculture driving the Bloomberg Commodity Spot Index up 2.4% to a ten-year high. Interestingly the continued rally helped attract profit taking, especially in some of the hot commodities such as crude oil, corn and copper. 

Commodities

Despite seeing the Blomberg Commodity Spot index rally to a fresh ten-year high with +4% gains recorded in 9 out of 24 major futures contracts, money managers instead opted for a small reduction in bullish bets to 2.5 million lots representing a nominal value of $150 billion. The most noticeable net selling hitting crude oil (45k) and corn (56k) while buyers concentrated their efforts in gold (29.5k), the soybean complex (16.8k), natural gas, gas oil together with sugar and cocoa.

Energy: Crude oil’s range bound behavior together with lower US demand due to the Colonial pipeline hack driving a slump in refinery runs, as well as ongoing virus worries in Asia helped drive a 45k lots or 6.4% reduction in the combined WTI and Brent crude oil long to 656k lots, a five-week low. Despite struggling to keep up with surging metal and agriculture markets, the reductions were mostly driven by long liquidation and only a limited amount of fresh short selling, something that otherwise could signal increased risk of a reversal. Gas oil traded on the ICE exchange saw strong buying for a third week with the net long reaching 138k lots, a 31-month high.

Metals: Copper’s 5.3% surge to levels beyond the 2011 record took was met by profit taking from money managers who instead of buying into strength, as they often do, opted to reduce their net long by 8% to 61k lots. Whether this action from the some of the brightest minds signal a short-term peak in the market remains to be seen.

The combination of a weaker dollar and falling real yields – on rising inflation expectations – helped drive a 45% increase in the gold net long to 95.6k lots, a 13-week high. Having traded within an uptrend since early April, gold will be facing key resistance next week in an area between $1845 and $1855 where three major technical indicators converge.

Latest: Gold (XAUUSD) trades above its 200-day moving average to challenge trend line resistance from the August high, today around $1858. A break signaling a potential extension to $1876, the 50% retracement of the August to March correction. A slightly stronger dollar being more than offset by lower Treasury yields following Friday’s disappointing U.S. retail sales. Broad weakness across the crypto space potential playing a part as well as the “store of value” label is being challenged.

Agriculture: The grains sector reached an 8-1/2 year high before suffering a major end of week setback after the monthly WASDE report projected lower corn exports and slightly higher production of all three major crops leading to higher new crop stock piles. Just like copper, corn traders chose to sell into the 3.7% rally thereby cutting their net long by 15% to 316k lots. Overall the combined net long in the three crops dropped to the lowest since December, thereby reflecting a distinctive cooling attitude to a rally which temporarily went parabolic. 

Forex

Broad dollar selling, which saw the Bloomberg Dollar Index down 1.2% on the week, helped drive a fourth weekly increase in the speculative short against ten IMM currency futures and the Dollar index. Last week’s 25% increase to $15.4 billon primarily benefitted the euro (9.1k lots), CAD (12.7k) and  GBP (8.3k). Elsewhere the CHF position flipped back to a net short while the BRL position in response to a 4.1% price jump turned net long for the for first time in 21 months.

Financials

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 reasons why we focus primarily on the behavior of the highlighted groups 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

 

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
Most of our staff in Singapore are working from home to help limit the spread of the coronavirus. We remain at your service on the details below. Thank you for your understanding.

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.