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COT: Squeeze risks after funds sold into rising commodity markets

Commodities
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, January 23. A week where risk appetite was supported a succession of record highs in the S&P 500 amid upbeat earnings reports and investors cheering the economy’s resilience despite the most aggressive policy-tightening in decades. Meanwhile, despite broad gains the commodity sector continued to see net selling from funds, especially in metals and grains, supporting the short squeeze that was seen towards the end of last week.

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, January 23. A week where risk appetite was supported by a succession of record highs in the two leading US stock market indices amid upbeat earnings reports and investors cheering the economy’s resilience despite the most aggressive policy-tightening in decades. A mood that was not hurt by a rise in US Treasury yields after Federal Reserve members warned that US rate cuts should not be expected anytime soon. Meanwhile, the commodity sector continued to see net selling from funds, especially in metals and grains, despite a much-improved tone which saw broad gains across the asset class.  

Commodities:

The Bloomberg Commodity index, which tracks a basket of 24 major futures markets split between energy (30.1%), metals (34.2%) and agriculture (35.7%), traded higher on the week with broad gains being partly offset by a 15% tumble in natural gas. However, despite the broad gains, the net long futures and options position held by hedge funds and CTA’s was nevertheless reduced for a fourth consecutive week, reaching a fresh September 2019 low. In the process leaving several commodities, especially industrial metals and energy futures exposed to what followed last week, not least rising geopolitical tensions, China’s surprise cut in its RRR as well as the US GDP surprise.

Selling was concentrated in metals and grains with short positions in copper, soybeans and corn reaching multi-year highs while demand was concentrated in WTI crude oil, gas oil, softs and livestock. 

Four weeks of selling has seen the net long across 24 major futures contracts slump 72% to 115k contracts, a June 2019 low. Selling being led by grains (-270k) and metals (-154k) and only partly offset by demand for energy (+66k) and softs (+50k)

Middle East risk premium continues to ebb and flow in crude and gold 

Last week’s technical driven rally in crude oil above recent resistance, in WTI at 75.50 and 80 in Brent, was extended on Friday and today in Asia before deflating following news about a Houthi attack on a tanker in the Red Sea and the drone strike that killed US army personnel in Jordan. Since early December when the Red Sea crisis threatened to spill over the wider region, the market has been trying to price in the risk of an actual but not yet realized disruption to supply, the result being a mostly range bound crude oil price seeing temporary spikes before deflating. 

The latest developments briefly sent Brent crude through the November high at 84.61 before running out of steam after Iran denied having anything to do with the weekend attack on a U.S. base in Jordan. It supports our belief that Iran has no intention of stoking a war that could set the Middle East alight and disrupt supply from the region. Key producers in the area and critical consumers of Middle East oil, especially in Asia, will not allow this situation to escalate to a point where supplies are being disrupted. Ahead of the US election, however, we may see the Biden administration tighten sanctions against Iran, but with plenty of spare capacity available from GCC members, the risk of a price spike is limited. 

Energy: Reversing recent behavior, WTI finally saw strong demand with the net-long jumping 48% to 134k, an 11-week high while Brent was reduced by 8% to 208k. The fuel contracts were mixed with a near doubling of the ICE Gasoil long standing out. Elsewhere, a 15% slump in natural gas saw the net flip back to a small short
Metals: Broad selling across the sector continued for a second week led by a 24% reduction in the gold long to a three-month low, the platinum and not least silver net flipped back to a short following Monday’s slump. Ahead of the China stimulus surprise funds had increased their copper net short to 31k, a near four-year high.
Grains: A sixth week of selling drove the net short across the six contracts tracked to a fresh May 2019 high at -524k. The soybean short reached a four-year high while the soymeal flipped to a net short following the most aggressive two-month selling period on record. A massive corn short extended further although the pace of selling showed signs of slowing.
In softs, all four contracts saw net buying as tight supply continues to boost prices, in some cases to record highs. The sugar long almost doubled as traders scrambled to rebuild positions as the January rally extended beyond 15%, while funds flipped their cotton position back to a net long as prices continued to recover.
In forex, speculators bought dollars for the second week, leading to a 41% reduction in the gross short position vs eight IMM futures and the DXY to $5.4 billion. Led by sellers of euros (15.8k), yen (14.1k) and AUD (6.3k), and only partly offset by demand for CAD (4.9k) and kiwi (1.1k).

Commodity articles:

19 Jan 2024: Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
16 Jan 2024: Data dependent precious metals continue their bumpy ride
12 Jan 2024: Commodity Weekly: Geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
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
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 and peak rate speculation 
10 Nov 2023: Commodity weekly: Crude oil risks overshooting the downside

Previous "Commitment of Traders" articles

15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further 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

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