COT: Reversal risk looms as funds cut commodity exposure

The combined long in WTI and Brent crude oil was cut for a third week with the reduction once again primarily concentrated in WTI. Rising US stocks and production have provided a less solid foundation than Brent, the global benchmark, which is being supported by voluntarily and involuntary production cuts from the Opec+ group of nations.

The Brent forward curve indicates the tightest market in five years and short-sellers have responded by staying firmly on the sidelines throughout the recent price correction. 

Gold has once again been left exposed to long liquidation following the failed attempt to break above $1,300/oz last week. Hedge funds have, like most others, been struggling to work out the direction for gold with geopolitical tensions and a worsening trade war between China and the US having so failed to generate enough safe-haven demand to trigger a renewed push to the upside. Last week was no exception when the biggest one-week buying spree since early December led to a two-day sell-off in response to recovering stocks and dollar buying reducing the need for protection and safe-haven demand.

Interest for silver remains muted as can be seen in its performance both against the dollar but also against gold. The XAUXAG ratio remains stuck at multi-decade high with the main source of demand from financial investors currently benefiting gold the most amidst focus on safe-haven allotment and growth concerns. The lack of interest was on display last week with the net-short hardly changing while funds rushed into gold. 

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

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.