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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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COT: Speculators dump crude oil on China concerns
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 Tuesday, November 29. A week that apart from commodities, which responded negatively to China protests, traded calmly ahead of key US economic data prints and a key speech from Fed Chairman Powell.
Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, 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 reasons why we focus primarily on the behavior of the highlighted groups 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
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This summary highlights futures positions and changes made by hedge funds across commodities and forex during the week to Tuesday, November 29. A week that, apart from some commodity sectors, saw markets trade calmly ahead of key US economic date prints and a key speech from Fed Chairman Powell. Overall, the S&P 500 and the dollar traded softer with bonds seeing a small bid.
Commodities
Concerns about the economic impact of fresh lockdowns in China and not least growing protests against the government's handling of Covid outbreaks, saw the Bloomberg Commodity index trade down 1% with a 3.2% loss across the energy sector being only partly offset by gains in precious and industrial metals, as well as grains. Hedge funds, responding to these developments, sold energy led by Brent crude oil while small amounts of profit taking reduced length in gold, copper and sugar. In demand were silver, soybeans, corn and coffee.
Overall, the net long across 24 major commodity futures saw a small 2% reduction to 1.13 million contracts representing a notional value of $68 billion. The total open interest across the 21 most traded futures contracts meanwhile dropped to a fresh and near ten-year low at 12.69 million lots. Led by a slump in energy where the short-term outlook has become increasingly murky as recession concerns battle Russian sanctions impact and OPEC+ production cuts. Since peaking at 8.7 million lots on January 28, the open interest across the six major energy contracts tracked in this has slumped by 30% to the current 6.1 million lots.
Energy
Hedge funds continued to aggressively sell crude oil futures in the week to November 29 as demand concerns from renewed China lockdowns and the general risk of an economic slowdown hurt prices and sentiment. During the last three reporting weeks the combined net long in WTI and Brent has been cut by an aggressive 187k lots or 41% to 265k lots, and lowest since April 2020 when the pandemic saw prices collapse.
The bulk of the reduction last week was seen in Brent where the combination of 21k lots of long liquidation and 18k lots of fresh short position drove a 28% reduction in the net long to 99k lots. driven by 39k lots reduction in the Brent crude net long to 99k. Additional, but muted long liquidation also helped reduce the net long positions in gasoil and RBOB gasoline.
Metals
Speculators were small sellers of gold for a second week with some profit taking emerging following a month that saw the yellow metal jump by more than 8% to record its strongest month in 28 months. Silver, up almost 16% in November, saw fresh buying with the net long at 14.7k lots being near the highest level since May. Copper had a relatively strong week with China concerns having a limited impact on the fund position and the price action. Overall, the net long saw a small 7% reduction to 12.7k lots.
Agriculture
Buyers returned to the grains sector following three weeks of net selling. Demand, however, was concentrated in the soybeans complex (+28.2k lots) and corn (+21k lots) while out of favor CBOT wheat saw its net short extend further to reach 54k lots, the biggest bet on falling prices since May 2019.
In softs, some small profit taking emerged in sugar following a three-week buying spree that lifted the net long by 358% to 197k lots. Additional and fresh selling was seen in cocoa and cotton while coffee buyers emerged for the first time since September to cut their net short by 9% to 19k lots.
Forex
In forex, the combined dollar position against nine IMM futures and the Dollar index returned to a small net long with broad but small buying of dollars seen against most currencies, led by JPY and CAD. Length remains concentrated in EUR which at 122k lots or €15.3 billion represents the strongest belief in the euro since March 2021.
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