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COT: Speculators chase false crude breakout; grain short extends further

Commodities
Ole Hansen

Head of Commodity Strategy

Summary:  Our weekly Commitment of Traders update highlights futures positions and changes made by hedge funds and other speculators across commodities and forex during the week to last Tuesday, January 30. A week that covered market developments ahead of the plunge in regional lender NYBC, the FOMC meeting where Fed chair Powell said a March rate cut was very unlikely and Friday’s bumper US job report. Commodities enjoyed a strong week with all sectors except grains recording gains, led by crude oil, copper, softs and livestock.

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 30. A week that covered market developments ahead of the plunge in regional lender NYBC, the FOMC meeting where Fed chair Powell said a March rate cut was very unlikely and Friday’s bumper US job report. Leading up to these events which helped strengthen the dollar further while sending Treasury yields on a roller coaster ride, financial markets had enjoyed another strong week with risk appetite being supported by strong earnings and contracting bond yields. Commodities enjoyed a strong week as well with all sectors except grains recording gains. 

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 second week with broad gains being only partly offset by weakness in natural gas and the soybean complex. Following four weeks of net selling, speculators, such as hedge funds and CTA’s finally responded to these improved developments by hitting the ‘buy’ button, leading to a doubling of their net long from a September 2019 low in the prior week. 


Buying was concentrated in energy, excluding natural gas, copper, sugar and livestock while the grains sector continued to be sold with the combined net short rising to near a five-year high. Precious metals were mixed with all the ducks not yet lined up in a row to support a breakout of the established ranges, in gold between $2000 and $2065. 

Energy: The combined crude oil net long jumped 69k contracts - the most since mid-December - to 412k contracts on technical buying following a geo-tension supported upside break. However, failure to keep the geopolitical risk premium inflated after the reporting week ended, helped drive the end of week slump. Diesel was in demand with the gas oil long doubling while net selling of natural gas continued.
Metals: A mixed week with rangebound gold seeing a fourth weekly reduction to 72k contacts, lowest in 3-1/2 months, while silver length – supported by China/copper strength – flipped back to a net long. Copper enjoyed its best week of buying om four years after the net short was cut by 89% to near neutral at -3k.
Broad grains sector selling extended to a seventh week, during which time the BCOM grains index slumped by 8%. In the last reporting week, the hedge fund net short reached a fresh May 2019 high at 563k lot with wheat so far, the only contract showing signs of easing selling pressure. The nominal value of the corn and soybeans net shorts both exceeding $6 bn
The softs sector saw profit taking in cocoa as the price approached a 46 year high, sugar buyers continued to play catch up following recent strong gains, while the Arabica coffee long almost reached a two-year high.
In forex, the speculative flows were mixed with selling of JPY and AUD being offset by demand for CAD, CHF and GBP while the euro positioning was little changed on the week. Overall, the gross dollar short versus eight IMM futures and DXY saw a small increase, the first in four weeks to $5.5 billion

Commodity articles:

2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
30 Jan 2024: Gold and silver look to FOMC for direction
29 Jan 2024: Video: Unpacking the reasons behind soaring coffee prices
26 Jan 2024: Commodity weekly: Back in black supported by China stimulus
25 Jan 2024: Grains up on short covering; softs supported by tight supply
24 Jan 2024:  Disruption risks drive specs into Brent; distorted EIA report up next
23 Jan 2024: Silver and copper in focus after recent declines
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


Previous "Commitment of Traders" articles

29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
22 Jan 2024: COT: Commodities short-selling on the rise amid China woes and Fed caution
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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