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COT: Crude oil and gold in demand ahead of FOMC

Commodities
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, forex and bond futures during the week to Tuesday, September 19. A week that saw stock markets trade softer with US Treasury yields rising ahead of last Wednesday FOMC meeting. Despite continued headwinds from a dollar trading near a six-month high, the commodity sector traded higher with gains led by energy and precious metals.

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, forex and bonds in the week to last Tuesday, September 19. A week that saw stock markets trade softer with US Treasury yields risen ahead of last Wednesday FOMC meeting. Despite continued headwinds from a dollar trading near a six-month high, the commodity sector traded higher with gains led by energy and precious metals as well as sugar and coffee.

Commodity sector:

The Bloomberg Commodity index traded higher for a fifth week, supported by 1.2% energy sector rally, firmer investment metals and strong gains in sugar and coffee. Continued tightness in the crude oil and fuel market drove WTI and Brent to fresh cycle highs before running into some mild profit taking. Precious metals meanwhile surprised to the upside with fresh longs and short covering seen ahead of the FOMC meeting, while the agriculture sector remains mixed with harvest pressure hurting grains being partly offset by renewed strength in softs and livestock.

Hedge funds and CTA’s responded to these developments by adding length in crude oil for a fourth week, rebuilding longs in gold and silver while increasing the gross short across grains and soybeans to a 27-month high.

Crude oil and fuel products: Leveraged fund buying of crude oil extended to a fourth week, in the process driving the combined net long in WTI and Brent to a 22-month high at 560k contracts, and while the underlying fundamentals point to higher prices in the short term, positioning looks increasingly stretched. The long/short ratio has surged higher during the past few weeks, driven by a fresh long and not least a collapse in the gross short to a 12-year low just 46k contracts. The product sector was mixed with selling seen in gasoil and gasoline.
Gold, silver and copper: Ahead of last week's FOMC meeting, the speculative long in gold jumped 34% to 66.6k contracts, silver doubled to a still small 2.3k contract long, platinum flipped back to a small 1.1k long while a near record short was maintained in palladium. The bulk of the buying was driven by short covering as funds cut bearish bets ahead of FOMC and despite an ongoing rise in bond yields and the dollar trading near a six-month high. Copper selling saw the net short rise by 55% to 5.8k.
In grains and soybeans, net selling across all but one of the six contracts lifted the combined net short to 208k contracts, the highest conviction in lower prices since June 2020. The bulk of the short being held in corn (-145k) followed by a 109k short in the two wheat contracts.
Softs & Livestock: Buying of sugar extended to a fifth week in response to the price reaching a fresh 12-year high, and at 213k contracts, the net long remains 73k below the 2016 record peak. A 6% jump in Arabica coffee prices supported a 46% reduction in the net short to 16.6k while cocoa and cotton had a quiet week.
In forex, eight weeks of dollar short covering finally saw the net against eight IMM futures flip back to a $4.5 billion long, an 11-monmth high. Selling was led by EUR (-11k), GBP (-12.5k) and AUD (-17.4k), the latter hitting a record short of 97k lots ($6.3 bn equivalent), while the Kiwi short reach a 2019 high at 21k ($1.3 bn eq)
In fixed income, flows were mixed with leveraged funds selling 2s, 5s as well as long bonds and ultras. Despite some buying of 10’s and 10’s ultra to offset, the overall DV01, being the value of a one basis point yield change, increased to a massive $419 million

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