COT: Crude length cut to eight-month low; dollar buying resumes

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, March 15. A week where risk appetite stage a small comeback with stock markets rising despite a continued flow of troubling news from Ukraine, and US Treasuries staging a sharp reversal with yields on the 10-year notes surging 30 basis point as the market priced in an imminent but long awaited US rate hike. In commodities, the Bloomberg Spot Index gave back the bulk of the 11% gain from the previous week with selling seen across most sectors. 

Commodities
The Bloomberg Commodity Spot index slumped by 8.3%, thereby giving back most of the gains seen during the first week of the Russian invasion. Russia-focused commodities like crude oil, palladium and wheat took the biggest hit in percentage terms. Overall the total net long held by managed money accounts across 24 major commodity futures was reduced by 5% to an eight-week low at 2.06 million lots, the biggest reductions seen in crude oil, natural gas, gold, silver, copper and coffee.

During 2021 the 30-day volatility on the BCOM Spot index traded within a 9% to 19.5% but since the war started on February 24, it has surged higher, reaching 31% last week, thereby forcing many hedge funds targeting a certain level of volatility to cut their exposure. The jump has been led by spikes in energy, industrial metals and grains, all of which have seen volatility more than double. As long the volatility remains stable, trend and momentum following hedge funds will normally buy into strength and sell into weakness. The mentioned volatility surge helps to explain the current behavior where positions have been cut to pre-war levels. 

Energy: Another week of extreme volatility in crude oil, this time a 22% move to the downside, drove a second weekly reduction in the combine WTI and Brent net long by 23k lots to a four-month low at 411k lots and just above the 400k lots reached in early December when crude oil briefly traded below $70/b in response to the omicron virus variant. Brent, the global benchmark saw its net long drop to a 16-month low at 153k lots.

As mentioned, when volatility spikes and traders are faced with rising margin calls on their open futures positions, the first reaction is to make an across the board reduction. This is currently very noticeable in the five oil and fuel contracts which have seen open interest fall from 7.1 million lots on March 12 to a current seven-year low at 4.7 million lots. 

Monday am market comment: Crude oil (OILUKMAY22 & OILUSAPR22) rose to a one-week high in Asia as the war in Ukraine keeps global supplies very tight with traders, mostly through self-sanctioning, avoiding Russian crude, currently being offered close to 30-dollar below Brent with a limited number of buyers queuing up to secure cheap cargoes. In addition, Middle East tensions also rose after Houthi rebels attacked sites across Saudia Arabia over the weekend. With supply tightening, the market will be looking for signs of demand destruction, mostly through the cost of diesel and gasoline as well as the impact of temporary covid related lockdowns in China.

Metals: Gold’s recent surge towards the 2020 record high and subsequent abrupt rejection helped drive a 5.5% correction and with that a relative small 16% reduction in the net long to 147.5k lots, the first weekly reduction in six weeks. Small in the sense that gold almost gave back all of its post invasion gains. With most of the reduction being driven by long liquidation and a very limited amount of fresh shorts, this highlights a change that was primarily driven by leveraged traders forced to reduce bullish bets. Other big changes were a 41% reduction in the platinum long and a 31% reduction in the copper long to 29k lots and just below the average sized positions leveraged funds have held during the past year.

Monday am market comment: Gold (XAUUSD) & silver (XAGUSD) trade steady as investors continue to weigh monetary policy tightening in the US against the inflationary impact of the Russia-Ukraine war. Long liquidation from leveraged funds who had loaded up on gold futures in recent weeks may have run its course, while longer-term focused investors have been continuing buyers of gold ETFs since the war began. During this time, total holdings have jumped by 134 tons to a one-year high at 3,246 tons, with more than half of the increase seen during golds recent 175-dollar correction. Gold as being bought as a hedge against elevated inflation and a central bank policy mistake with slowing growth potentially preventing the FOMC from carrying out its planned number of rate hikes before being forced to revert to a period of renewed stimulus. Key support at $1890/oz with a break above $1957 needed to signal fresh upside potential  

Agriculture: Coffee long liquidation accelerated as it extended to a fourth week with the net long falling 26% to an eight month low at 29k lots. In sugar, a 4.8k lots small reductions followed the massive 79.5k lots jump the previous week. Grains were the only sector seeing net buying and after four weeks of continued buying the total long across the six contracts tracked in this has reached a ten-year high at 803k lots. The bulk being held in the soybean complex (363k) and corn (373k) with the recently surge in wheat to record highs only a attracting a 67k lots position in the Kansas and Chicago wheat contracts. 

Forex

Continued market turmoil and expectations for an imminent rate hike from the US Federal Reserve helped drive the first increase in bullish dollar bets since early January. The aggregate dollar long against ten IMM currency futures and the Dollar Index jumped by 53% to $10.7 billion.

On an individual level we find several major changes with biggest being a 68% reduction in the euro long to just 18.8k lots, the 40k lots reduction was the biggest one-week of net selling since June 2018. Specs also sold JPY (6.5k), GBP 16.5k) and not least MXN where 63.6k lots of selling, the biggest one-week reduction in two years flipped the position back to a net short. Countering these changes were buying of CAD (10k) as well as the antipodean currencies of NZD (16k) and not least the AUD where the 33.3k lots of buying, the biggest in seven-years helped reduce the net short by 43% to 44.9k lots.

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