Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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COT: Crude long hits 12-year low ahead of FOMC bounce
Ole Hansen
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 last Tuesday, December 12. A week that showed how investors positioned themselves ahead of the FOMC meeting last Wednesday when Powell delivered his pivot towards rate cuts. The commodity sector continued to see heavy net selling by hedge funds, once again driven by the energy sector which saw bullish bets on WTI and Brent slump to a 12-year low.
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 and forex in the week to last Tuesday, December 12. A week that showed how investors positioned themselves ahead of the FOMC meeting, where Powell delivered his pivot towards rate cuts. An announcement that triggered a buy-everything-rally across equities while commodities benefitted from short covering after hedge funds had cut bullish bets to a 3-1/2 year low. In addition, the dollar was sold for a fourth week resulting in a fresh short position emerging against its major peers.
Returning to the reporting week and the commodity sector continued to see heavy net selling by managed money accounts, such as hedge funds and CTA’s. Overall, the net long across the 24 major commodity futures markets tracked in this report was reduced by 46% to 274k contracts, a 3-½-year low. Since early October the net long has collapsed by 82% during a time when the Bloomberg Commodity Index has suffered a relatively small 6% correction to a one-year low.
Commodities:
Returning to the reporting week and the commodity sector continued to see heavy net selling by managed money accounts, such as hedge funds and CTA’s. Overall, the net long across the 24 major commodity futures markets tracked in this report was reduced by 46% to 274k contracts, a 3-½-year low. Since early October the net long has collapsed by 82% during a time when the Bloomberg Commodity Index has suffered a relatively small 6% correction to a one-year low.
The sector driving the weakness during this nine-week period has almost exclusively been the energy sector, down 21%, followed by a 3% drop across industrial metals, while precious metals and to a lesser extent the agriculture sector helped offset the losses with gains of 8% and 2% respectively.
These developments highlight an increasingly under owned asset class which has struggled in 2023 amid growth worries in China and the wider world, and a sharp rise in funding costs leading industries to reduced excess inventories. It also highlights a sector which given the right circumstances may see a strong recovery in 2024 once the technical and/or fundamental outlook becomes more supportive, thereby leading to fresh buying and short covering from speculators. Drivers that may trigger such a change could be rate cuts lowering the funding costs and with that the inherent contango leading to industry restocking of inventories, OPEC maintaining a tight control of the supply of crude oil, and not least signs of tightness across key commodities that will help offset the risk of an economic slowdown across key economies.
Previous "Commitment of Traders" articles
- 11 Dec 2023: COT: An underowned commodity sector raising risk of an upside surprise in 2024
- 4 Dec 2023: COT: Speculators add fuel to gold rally
- 20 Nov 2023: COT: Crude selling slows, grains in demand
- 14 Nov 2023: COT: Crude long slumps; agriculture sector in demand
Commodity articles:
- 14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
- 13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
- 12 Dec 2023: Video - Investing in Uranium
- 8 Dec 2023: Commodity weekly: Broad commodity weakness amid growth concerns
- 1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
- 30 Nov 2023: Precious metals take top spot for a second month
- 23 Nov 2023: A nervous crude oil market awaits OPEC's next move
- 23 Nov 2023: Podcast: Will Santa deliver another golden gift
- 22 Nov 2023: Will gold and silver see another Santa rally?
- 17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
- 16 Nov 2023: Podcast: Silver comeback, watch OPEC as crude oil slides lower
- 16 Nov 2023: Crude oil weakness adds focus to upcoming OPEC meeting
- 15 Nov 2023: Soft CPI lifts gold and beaten down silver and platinum
- 12 Nov 2023: Copper supported by green transformation demand, China stimulus and peak rate speculation
- 10 Nov 2023: Commodity weekly: Crude oil risks overshooting the downside
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