COT: Oil longs trimmed again ahead of spike

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, February 8. A week that included the much stronger than expected US report, but not last Thursday’s CPI shocker. The job report helped send US 10-year Treasury yield to a two-year high while stocks resumed their decline as the market priced in a more aggressive pace of US rate hikes. The dollar traded softer, especially against the euro, while a near unchanged week in commodities hid the fact that most raw materials saw strong gains with the exception of few led by a slump in natural gas.

Commodities
The Bloomberg Commodity Spot index reached a fresh record high during the week before ending close to unchanged after an 11% loss in natural gas offset broad gains across most other commodities and sectors. Once again, however, the continued turmoil in stocks and bonds lifting volatility probably prevented leveraged funds from adding exposure. As a result the combined net long across 24 major commodity futures held steady at 2.1 million lots. Long liquidation across the energy sector together with pockets of risk reduction across the agriculture sector led by corn and soybeans helped offset net buying of gold, copper, soybeans, cocoa and cattle.

Energy: Instead of adding fresh longs as crude oil rallied to a seven year high, speculators instead cut their net long for a third consecutive week. A decision probably driven by a loss of momentum as the market focused on the prospect for an Iranian deal, as well as elevated volatility across other assets forcing a broad reduction in exposure. During the past three weeks, an +8% rally in crude oil up until last Tuesday triggered a 5k lot increase in the gross short to 102k lots (One lot equals 1000 barrels) while profit taking reduced the gross long by 35k lots to 621k lots. Other major changes was a 30% reduction in the NY Harbor ULSD Diesel long while the the 11% collapse in natural gas only attracted a 5% reduction driven by fresh short selling.

Metals: Speculators continued to chase the recent volatile price action in gold, and following a 55k reduction the previous week after the hawkish FOMC meeting, the net long rose 22k lots to 85k lots (One lot equals 100 ounces) on a combination of fresh longs and short covering. Gold’s relative big price swings within an established range tends to be an unprofitable period for many leveraged funds as they are constantly forced to adjust positions amid a constant changing technical outlook. In addition, correlation tracking trading ideas continue to suffer with golds ability to withstand surging real yields forcing short covering.

Silver’s near 3% rally triggered some additional long liquidation with the net falling to 10k lots, a two-month low. Steady trading copper which was about to attempt another (failed) upside breakout attempt was bought to the tune of 5.5k lots lifting the net long to 24.8k lots, still some 73% below the record long interest from October 2020.

Agriculture: The grains sector was mixed with continued buying of soybeans lifting the net to a nine-month high at 166k lots, being more than offset by selling of corn and wheat, the latter seeing an increase in the net short to 29k lots, the most bearish since July 2020. In softs, the sugar long was cut to a fresh 20 month low, the cocoa long jumped 130% to 34.2k while a renewed rally in coffee lifted the net long by 8% to 56k lots.

Forex
Ahead of Thursday’s US CPI shocker speculators continued to be net sellers of dollars, this time driven by EUR and GBP buying, the previous weeks laggards. As a result the dollar long against ten IMM currency futures and the Dollar Index has now during the past four weeks more than halved, dropping to a 5-1/2-month low at $10.8 billion.

The most elevated position compared with the past twelve months remain the Aussie dollar short which after three weeks of short covering was sold again. The net short at 85.7k lots is just 6% below the record reached last month.

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