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COT: Declining momentum may signal shift toward consolidation

Commodities
Ole Hansen

Head of Commodity Strategy

Key points:

  • Commitment of Traders report highlighting futures positions and changes made by speculators across forex and commodities during the week to April 16 
  • Aggressive IMM selling lifts dollar long to a November 2021 high
  • Loss of momentum, a short-term challenge for recent in-demand crude, copper, gold and silver contracts

COT on forex

In the forex market, a 2% jump in the Dollar Index triggered continued aggressive and broad dollar buying from speculators, resulting in the gross dollar long versus eight IMM currency futures jumping by USD 8 billion to USD 25.6 billion, the highest since November 2021. All but NZD saw net selling, led by EUR, GBP and CAD.

Several IMM futures positions reached levels not seen for a number of years, the most notable being the JPY short at 165.6k contracts (USD 13.5 billion equivalent) reaching a 17-year high. The CAD short at 82.8k contracts (USD 6 billion) a seven-year high, and the CHF short at 36.2k contracts (USD 5 billion) a five-year high. Other major developments were a slump in the EUR net long to a September 2022 low at 12.2k contracts.

Non-commercial IMM futures positions versus the dollar in week to April 16

COT on Commodities

In the week to 16 April, the Bloomberg Commodity Total Return index traded flat with continued gains in gold, silver, copper, crude oil and coffee offsetting losses in natural gas, diesel and most agriculture futures led by soybeans, cotton and hogs. Despite seeing the asset class traded close to unchanged on the week, managed money accounts, such as hedge funds and CTAs nevertheless responded to dollar and Treasury yield strength as well as lower risk appetite filtering through from the stock market, by cutting longs across energy and metals while adding to an already heavily shorted grains sector.

A general loss of risk appetite filtering through from last week’s long overdue equity market correction may in the short term create some headwinds for some of the recent in-demand commodities, especially crude oil, gold, copper and silver. The nominal exposure in the first three has since the start of the year more than doubled to a two-year high around USD 95 billion. While underlying fundamentals remain supportive, a speculative long enduced correction may in our opinion create a fresh buying opportunity. 

Managed money long, short and net positions in the week to April 16. Net selling seen in 20 out of 26 major contracts, primarily across agriculture
Energy: Crude oil saw a small net reduction with selling of WTI being partly offset by an extension of the Brent long to 335k contracts, a three-year high. Products were mixed with falling refinery margins driving net selling in the two distillate contracts of gas oil and ULSD (HO). The natgas short rose 53% in response to a 7.5% selloff
Metals traded mixed with gold seeing some emerging profit taking while broad industrial metal strength supported a buildup in silver and copper net longs to 24- and 30-month highs.
Grains: Broad selling lifted the sector short by 95k to 656k contracts, just 30k below the March record short. A promising start to the Northern Hemisphere planting and growing season weighing on prices
In softs, the Arabica coffee long reached a fresh record, and cocoa a one-year low. A near 8% drop in sugar drove a 55% reduction in the net long, while cotton’s +5% slump led to a 42% reduction.

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.

Commodity articles:

19 April 2024: Commodity weekly focus on copper, gold, crude and diesel
17 April 2024: Copper rally extends to near two year high
16 April 2024: Crude oil's risk premium ebbs and flows
12 April 2024: Gold and silver surge at odds with other market developments
10 April 2024: Record breaking gold highlights silver and platinum's potential
5 April 2024: Commodity market sees broad gains, enjoying best week in nine months 
4 April 2024: What's next as gold reaches USD 2,300
3 April 2024: Q2 Outlook: Is the correction over?
3 April 2024: Cocoa: A 50% farmgate price boost a step in the right direction
27 Mar 2024: Crude oil maintains support amidst array of bullish signals
26 Mch 2024: Gold's behaviour points to sustained demand
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

Previous "Commitment of Traders" articles

15 April 2024: COT: Hedge funds propel multiple commodities positions beyond one-year highs
8 April 2024: COT: Speculative interest in metals and energy gain momentum
2 Apr 2024: COT: Gold and crude longs maintained amid strong underlying support
25 Mch 2024: COT: Hedge funds zoom in on crude, copper and silver
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


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