COT update: Dollar longs surge as commodity liquidation reaches decade high

Commodities  

In commodities, a 4.5% slump in the Bloomberg Commodity Index triggered a third consecutive week of broad and aggressive selling by managed money accounts, with all but a handful of the 25 major futures contracts tracked in this update recording net selling. Measured by both contract volume and notional value, it was a heavy week for the sector, with liquidation concentrated in Brent crude, gold, soybeans and corn. Over the past three weeks, hedge funds have liquidated close to one million contracts across commodities, by far the largest reduction in positioning seen over the past decade. Importantly, this wave of selling has left positioning considerably leaner, reducing the risk of further forced liquidation and leaving traders better placed to respond to changes in the technical and fundamental outlook.

In energy, the Brent crude net long was cut by 43.6k contracts to 208.9k, a five-month low and less than half the 430k-contract peak recorded during the early stages of the Middle East crisis. Selling in WTI remained relatively muted, partly reflecting an already reduced position and continued trader focus on Cushing inventory levels for signs of potential stress that could support WTI relative to Brent.

In metals, 7% and 5% declines in the Bloomberg precious and industrial metals indices respectively drove broad-based selling across all five metals tracked in this report. The gold net long was reduced to 103.7k contracts through a combination of long liquidation and fresh short selling, while the recent in-demand HG copper contract saw its net long trimmed by 8% to 71k contracts after reaching a more than five-year high the previous week.

Once again, however, the bulk of the liquidation occurred across the agriculture sector, where positioning continues to unwind at a rapid pace. Since reaching a four-year high last month, the combined net long across 13 major agricultural futures contracts has collapsed by 83% to just 179k contracts. The move has been driven primarily by a 688k-contract reduction in bullish positions across corn, soybeans and wheat, led by corn as incoming harvest pressure weighs on wheat prices and generally favourable US growing conditions improve production prospects for both corn and soybeans. The scale of the decline suggests speculative long liquidation, particularly in corn and soybeans, has amplified an already fundamentally driven correction.

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.