Head of Commodity Strategy
Summary: Hedge funds bought commodities for a second week with all sectors seeing net buying, including the three up until recently under fire agriculture sub-sectors of grains, softs and livestock. WTI was bought and Brent sold despite the record one-day price spike. Buying of gold resumed after support was established below $1500/oz.
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.
Hedge funds bought commodities for a second week with the combined long across 24 major futures contracts jumping by 85% to 296k lots. All sectors were net bought, including the three up until recently under fire agriculture sub-sectors of grains, softs and livestock. Biggest surprise, however was the limited response from oil traders to the temporary removal of nearly 6% of daily global production.
The biggest surprise in last week’s data was the lack of buying of crude oil following the attack on the world’s biggest oil processing plant in Saudi Arabia. The record price jump in Brent triggered a surprise 3% reduction primarily through long liquidation while the gross-short instead of being reduced saw a small increase.
Money managers probably refrained from buying the market for a number of reasons. The initial price spike left the level unattractive and probably also forced some to reduce exposure as volatility spiked. Others are likely to have viewed the rally as being unsustainable at a time when demand growth is weakening.
WTI meanwhile was bought on the prospect of increased exports after the opening of new pipelines from Texas’s Permian shale oil basin to the U.S. Gulf coast.
Gold was bought in response to heightened geo-political tensions and ahead of last Wednesday’s FOMC rate cut decision. The solid support at $1485/oz helped create a floor from where fresh buying emerged (+8k) and short sellers (-6k lots) reduced exposure. Gold closed strongly on Friday on speculation that the U.S. had a rejected a partial trade agreement with China.
HG copper was bought for a second week despite posting the biggest one-day loss in six weeks last Monday after weaker-than-expected Chinese industrial data and the attack in Saudi Arabia. The platinum net-long held steady near a 19-months high.
Nine weeks of selling lifted the corn net-short to 170k lots. A potential head-and-shoulder on ZCZ9 could now leave short positions exposed on a break above $3.8/bu. The soybeans net-short was cut by 44k lots, the biggest one-week reduction since last December. China’s resumption of buying saw the price briefly return to $9/bu before heading lower on renewed trade worries.
Sugar’s biofuel link to oil drove a temporary jump following the Saudi attack. This was however not enough to prevent another increase in the already record short by 10% to 235k lots. The cocoa net-short was almost cut in half as the price surged on supply concerns in West Africa. Another false dawn in coffee triggered a 19% reduction in net-short before the price dropped back below $1/lb.
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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