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COT: Hedge funds zoom in on crude, copper, and silver

Commodities
Ole Hansen

Head of Commodity Strategy

Summary

  • Notable hedge funds buying of crude, copper and silver left all three vulnerable to end of week dollar strength
  • Gold buying paused ahead of FOMC with attention instead turning to silver
  • Grain buying extended to a second week; funds sold into continued cocoa surge
  • A seven-fold increase in the dollar long against seven IMM forex futures

Forex: 

In the forex market, broad dollar strength continued ahead of Wednesday’s FOMC meeting resulting in a seven-fold increase in the gross dollar long against eight IMM forex futures to USD 7.9 billion. Except the Mexican peso which saw its net long jump to a four-year high supported by a rising carry, the bulk of the dollar buying was driven by a 35% reduction in the EUR long to an October 2022 low at 48.3k contacts. In addition, Bank of Japan’s dovish hike helped trigger fresh short selling of the yen, the AUD net short reached a record high at 107.5k contracts (USD 7 bn equivalent) while the CHF short reached a 28-month high at 20.5k contracts.

Non-commercial long, short and net positions across key IMM currency futures

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 for a third week, but while recent gains had been driven by broad sector strength, the gains seen during the latest reporting week were concentrated in energy and a few other commodities, most notably silver, copper, cocoa and coffee.

On an individual level, three commodities; crude oil, silver and copper stood out with buying of the three amounting to a nominal value of USD 13.4 billion, on an individual level lifting the net long of all three to one-year highs. With such an inflow of fresh longs these three markets were left vulnerable to the end of week correction that was triggered by a sharply stronger dollar, not least against the Chinese renminbi.

Managed money long, short and net positions in the week to March 19.
Energy: Strong week for the sector led by 7% gains in crude oil, lifting the Brent and WTI combined net long to a five-month high at 509k contracts. Russian fuel supply concerns lifted the gas oil (diesel) long by 42% while higher natural gas reduced the short by 20%
Metals: Funds turned small net sellers of gold following a two-week rush that saw the net long jump 91.5k contracts to a two-year high. Instead, silver buying picked up pace, driving the net long to an April 2022 high. Copper’s temporary upside break lifted the net long to a 14-month high, leaving it exposed to end of week profit taking as the dollar strengthened
Grains: short covering extended to a second week led by the soy complex and corn
Softs: funds continued to sell into surging cocoa prices, reducing the net long to a one-year low, and with coffee and cocoa also sold the sector suffered an overall 5% reduction in the combined net long.

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.

20 Mch 2024: Attacks on Russian refineries lift risk premium and crude prices
19 Mch 2024: How to add copper exposure to your portfolio
15 Mch 2024: Commodity weekly: Green shoots seen across key sectors
13 Mch 2024: Lack of catalyst pushes crude into tightening range
8 Mch 2024: Commodity weekly: Gold and silver steal the limelight
8 Mch 2024: Investing with options - Gold optionality
6 Mch 2024: How to add gold exposure to your portfolio
6 Mch 2024: Video: What happened to the gold prices?
1 Mch 2024: Grains dip, cocoa soars, gold and oil see rays of strength: February’s commodity mix
29 Feb 2024: Podcast: Why speculative interest is important to understand
28 Feb 2024: Oil price stuck in neutral despite underlying strength
27 Feb 2024: Resilient gold market defies lower rate cut predictions
22 Feb 2024: Copper short squeeze fades ahead of key resistance
21 Feb 2024: Gold's resilience despite recent futures and ETF selling
20 Feb 2024: WTI crude eyes resistance amid improved signals
16 Feb 2024: Commodity weekly: Grains tumble; Industrial metals eye China boost
15 Feb 2024: US rate cut delay drives gold below $2000
13 Feb 2024: Video: What is driving Cocoa's sweet price
9 Feb 2024: Commodity weekly: Refined product strength lifts crude
9 Feb 2024: Podcast: Year of the metals
7 Feb 2024: Crude oil supported by tightening fuel outlook
6 Feb 2024: Gold and silver turn defensive on reduced Fed rate-cut optimism
2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows

Previous "Commitment of Traders" articles

18 Mch 2024: COT: Hedge funds buying expands from precious metals to copper and grains
11 Mch 2024: COT: Specs rush back into gold, elevated yen short in focus
4 Mch 2024: COT: Underinvested speculators fuel gold's latest surge
26 Feb 2024: COT: Record corn short, cocoa surge no longer supported by speculators
19 Feb 2024: COT: US inflation surprise drives broad selling of metals
5 Feb 2024:COT: Speculators chase false crude break; grain short extends further


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