Speculators Bet on a Continued Commodity Rally in 2021

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.

The below summary highlights futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, December 8. A week where vaccine and stimulus optimism continue to propel stock markets higher and the dollar lower while bonds held steady. Commodities traded mixed with continued profit taking across agriculture commodities and a big setback for natural gas more than offsetting gains in oil, fuel products and metals, both precious and industrials.

Commodities

The Bloomberg Commodity Index traded lower by 1.2%, hurt by continued profit taking in agriculture commodities led by soybeans, wheat, cocoa and cattle together with a 16.7% drop in the price of natural gas. Overall these developments helped drive a 3% reduction in the total net long held by speculators across 24 major commodities to 2.3 million lots, but not far from the February 2017 record of 2.4 million lots. A clear sign that speculators expect more to come from the commodities in 2021 as the reflation trade gathers momentum and the dollar potentially continues to weaken.

It is also worth noting that speculative positions, compared with recent peaks in 2017 and 2018, are much more spread out across all sectors, with net long positions held in all but one (CBOT Wheat) commodity. In February 2017 when the net-long hit the mentioned record, the energy sector accounted for 56% of the total length while today that share is down to 42%.

graph 1

Energy

The combined net long in Brent (+27k lots) and WTI (-1.6k lots) reached 602k lots, the highest since January. This after Brent began toying with $50/b as the market, despite current Covid-19 lockdowns and loss of mobility, continued to price in a vaccine-led recovery next year. The natural gas long was cut by 26% by in response to a dramatic 16.7% sell-off on demand concerns driven by unseasonal warm weather across the U.S.

Metals

Gold was bought for a second week in response to the rally that followed the failed break below $1800/oz. The bulk of the 19k lots of buying was driven by fresh longs, something that also helps to explain the increased volatility seen last week when the move above and subsequent failure to hold $1850/oz triggered a 45 dollar correction last Wednesday. Net platinum buying extended into a fifth week and during this time, the white metal has outperformed its yellow big brother by 17%.

Speculators in silver meanwhile maintained a net long close to 43k lots for a fourth consecutive week. Thereby extending the lack of price response in a week where the metal rallied by close to 3%. During a week of sideways trading before popping to a fresh seven-year high, the net long in HG copper rose by 5% to 90.4k lots, not far from the 91.6k lots record high recorded two months ago.

Agriculture

For a second week, a broad but relatively small amount of selling was seen across the sector with the soybeans complex and sugar accounting for the bulk of the 58k lots reduction to 1 million lots. Only short position was held in CBOT wheat before a post-WASDE and Russia export tax and quota threats gave the crop a strong end of week boost.

graph 2

Forex

Dollar bears continued to be awarded in the week to December 8 as the Greenback spiraled lower to reach the lowest against both the euro and the Bloomberg Dollar Index since April 2018. The tumble being part of a broader vaccine optimism led move across financial markets pricing in a recovery in global growth for 2021 and the potential for better investment opportunities outside the U.S.

These developments helped drive a 14% increase in the combined dollar short against ten IMM currency futures and the Dollar Index to $30.7 billion, a ten-week high. The bulk of the $3.7 billion of net dollar selling occurred against the euro which saw a 12% rise in the euro net-long to 156,429 lots (€19.6 billion). The other and more surprising contribution came from Sterling which despite trading lower on the week saw 13,609 lots of net buying which swung the net back to a long for the first time in three months.

The Swiss franc together with the Mexican Peso and Russian Ruble saw net selling while the net long in Japanese yen reached a fresh four year high at 48,166 lots.

graph 3

Financials

graph 2

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

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

COT

This article is provided by COT, part of Saxo Bank Group through RSS feeds on FX Empire

Metals: Momentum Concerns Drive Volatility Risk Higher

Gold is currently consolidating having made it back to relative safety above $1850/oz, the level below which triggered a recent slump to $1764/oz. The news flow continue to be dominated by encouraging vaccine developments, stimulus talks in the U.S. and Brexit talks in Europe.

Vaccine rollouts, initially in the U.K. and soon across the Europe and the U.S. have so far been offsetting the potential for more stimulus in Europe, Japan and not the least the U.S. being added to the unprecedented amounts already having been applied to prop up economies this year.

We have, however, entered the time of year where profits are being defended and where lack of momentum can cause some major price swings. Markets currently lacking momentum are precious metals and more recently also platinum while copper still look well supported following its latest run higher.

The dollar meanwhile remains on the defensive while also highlighting the risks of an increasingly one dimensional markets with the lower dollar argument being almost entirely bound up in soaring risk appetite. The bond market is currently not sending a clear signal with the yield on U.S. 10-year Notes holding below 1%. Yesterday’s 3-year Treasury auction was weak and we have 10-year and 30-year auctions up today and tomorrow, respectively.

Against the risk of rising nominal yields we still find real yields stuck deep into negative territory and yesterday the ten-year real yield temporarily dropped below -1% for the fist time since October.

Yesterday saw the first increase in flows into exchange-traded funds backed by bullion. The 118,000 ounce addition was the first noticeable increase in almost one month. During this time investors have reduced total holdings by 418,000 ounces or 3.8%. While the key level of gold support can be found at $1850/oz. the next level of resistance is $1883/os, the 38.2% retracement of the August to November correction, followed by $1900/oz.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Gold Market not Ready for an Election Shock

What is our trading focus?

XAUUSD – Spot gold
GCZ0 – Gold future, December 2020
GDX:arcx – VanEck Gold Miners ETF
GLD:arcx – SPDR Gold Shares
IGLN:xlon – iShares Physical Gold (UCITS eligible)


With less than a week to go before the U.S. presidential election on November 3 we take a closer look at the latest gold market developments. The election, potentially one of the biggest event risks of the year comes on top of ongoing worries about a renewed acceleration in Covid-19 cases in Europe, the current epicentre, as well as in the U.S.

Gold has settled into a relative narrow range around $1900/oz with U.S. stimulus on/off talks, bond, forex and stock market developments not given the market a significant signal in either direction. With this in mind we turned our attention to the options market for clues as to how investors and traders are positioning themselves ahead of Tuesday. To do this we ran an update on the most actively traded options in GLD:arcx and GDX:arcx, the biggest gold and gold miners ETF’s.

Looking at options with expiry after the election we found, perhaps not surprisingly but also somewhat concerning, an overwhelming focus on the upside via calls.

The massive $77 billion SPDR Gold Shares Investment fund (GLD:arcx), last traded at 179, only have one put options registered among the top ten most traded during the past week. Among the short-dated options with expiry in 23 days on November 20, the 183 and 184 calls are the most traded. The most popular strike, both in terms of volume and open interest is the 195 call expiring on January 15.

Top ten post US election traded options

Moving onto gold miners we take a closer look at the $16.5 billion VanEck Vectors Gold Miners ETF (Ticker: GDX:arcx), last traded at 38.8. The ETF tracks the NYSE Arca Gold Miners Index and invests in materials stocks of all cap sizes across the globe. While a bit more nuanced we still find a majority of call options among the ten most traded strikes.

At the top we find emerging signs of hedging activity after the 38 Put, expiring on November 20, traded more than 9000 lots on Tuesday. The strike that has attracted a large following, as seen through the open interest, is the 40 Call expiring on January 15.

gdx options

While large speculators in gold futures such as hedge funds and CTA’s have more than halved their exposure since the latest peak in February,  total holdings in exchange-traded funds backed by bullion have seen a continued climb to the current near record level around 111 million ounces.

"paper" gold position

Investors have been attracted to gold for a number of reasons during the past year and that support is expected to continue no matter who wins the keys to The White House next week. Global interest rates are at rock bottom levels and are likely to stay there for prolonged period of time. Considering the pandemics growing negative economic impact on the global economy we can expect continued monetary and fiscal support that eventually may lead to rising inflation and a weaker dollar. Developments that eventually could drive gold higher toward $2000/oz and eventually beyond.

Judging from the options market, however, the gold market is close to ignoring the risk of an election outcome that in the short-term at least could rock the current bullish sentiment. The weakness seen across stock markets and renewed dollar strength are both warning signs of rising risk aversity. If that extends beyond Tuesday, perhaps on the combination of a Biden win and a Republican controlled Senate, gold could be exposed to a “dash for cash” sell-off, potentially to $1835/oz or perhaps even as low as $1762/oz. A level that represents a 50% retracement of the March to August rally.

While maintaining a bullish outlook we also worry that next week’s election in a worst case scenario could trigger a deeper correction. While not on the 15% scale seen in 2016 following Trump’s shock win, investors may consider the use of options to hedge against short term adversity.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Copper, a Potential Casualty of Further Dollar Strength

What is our trading focus?

HG Copper – COPPERUSDEC20
COPA:xlon – WisdomTree Copper ETC (UCITS eligible)


Copper’s impressive recovery and momentum from the March low, has started to slow with the price struggling to extend its impressive gains beyond 3.10/lb on High Grade copper (COPPERUSDEC20). The rally seen across industrial metals, not least copper, in recent months has been driven by a post-pandemic recovery in Chinese demand supported by credit and scattered supply mine disruptions.

While the fundamental outlook remains supportive, the lack of fresh upward catalysts may now pose a short-term challenge to this poster-child of momentum. Something that has helped attract a substantial amount of speculative long positions from trend following strategies that many hedge funds and CTA’s adhere to.

Copper is currently challenging the uptrend from the March low, but in our opinion the price would have to break below $2.95/lb before it kicks off a correction/consolidation phase. Just like gold’s current correction has more to do with dollar strength than changed fundamentals, an extended period of dollar strength could be the trigger that for now could pause this classic momentum trade.

 

Source: Saxo Group

A key source of inspiration behind the rally has been the continued slump in stocks at warehouses monitored by the three major futures exchanges in New York, London and Shanghai. Not least the drop to a 14-year low in stocks monitored by the London Metal Exchange has supported the market. The tightness that it signaled drove the spot premium over the three-month benchmark to an 18-month high at $40/t last week before easing lower to $28/t yesterday.

During the past week stock levels have stabilized on LME while levels monitored by the SHFE has seen a steady rise since late June. This development combined with softer prices in Shanghai may potentially have shut the arbitrage window for profitably importing copper into China.

The reason why copper risks a non-fundamental supported correction can be found in the weekly Commitments of Traders report. The mention strong momentum has continued to attract an ever increasing net-long position held by speculators such as hedge funds and CTA. Given that many of these positions are purely based on technical analysis a break below $2.95/lb could trigger a correction.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Gold Bulls Challenged on a Sustained Break Below $1900/oz

What is our trading focus?

XAUUSD – Spot gold
XAGUSD – Spot silver
XPTUSD – Spot platinum
XAUXAG – Gold-Silver ratio
IGLN:xlon – iShares Physical Gold
ISLN:xlon – iShares Physical Silver
IPLT:xlon – iShares Physical Platinum


In our latest update titled “Gold too passive, risks deeper correction”, we observed how gold increasingly had seen its movement mirroring those seen in U.S. stocks. The lack of fresh input from bonds and the dollar – up until yesterday – meant that algorithmic trading systems, often trading correlations between markets, have moved to the driving seat, thereby creating an unusually positive correlation between gold and stocks.

We maintain a positive medium term outlook for gold but also accept that tactical trading strategies may pounce on the break below $1900/oz in order to force long liquidation and lower prices. Based on the latest price action, the short-term outlook has turned more neutral with the additional dollar strength and stock market weakness being the two key risks for the market.

Gold dropped below $1900/oz on technical selling only to climb back above when the break was met with strong buying interest through exchange-traded funds. Having broken below the 50-day moving average, the risk of an even longer and deeper correction can not be ruled out. Fibonacci levels to watch are $1872/oz followed by $1825/oz.

GOLD GRAPH
Source: Saxo Group

The combination of gold’s current correlation with stocks, losing further ground, and the dollar rallying the most in three months was the trigger that sent precious metals into a mini tailspin. The markets are currently reacting to dimming outlook for further U.S. fiscal stimulus, rising Covid-19 cases around the world, U.S.-China tensions and the very clear risk of increased volatility around the presidential election.

As mention, the dollars biggest advance in three months took the EURUSD uncomfortable close to the 1.1700-1.1735 pivot area. Speculators have increasingly in recent months been expressing their negative dollar view through buying of EURUSD. A break below could see the Greenback rally onto the comeback trail, thereby creating additional headwinds for commodities.

However, precious metals stood out yesterday with the sector taking a bigger hit than growth dependent sectors such as industrial metals and energy. It also once again highlighted the battle between short-term technical traders selling futures on the technical break below $1900/oz and long-term investors rushing in to snap up gold at lower prices. Total holding in exchange-traded funds backed by bullion jumped by almost 36 metric tons or 1.2 million ounces yesterday, the biggest one-day increase in more than four years.

Once again it was silver and platinum, a recent climber, which bore the brunt of the selling. The gold-silver ratio jumped to 79 after having traded in a relative tight range around 72 ounces of silver to one ounce of gold. Platinum meanwhile also suffered from its lack of liquidity and despite a recent improvement in the fundamental outlook it slumped with the gold-platinum ratio rising to 2.14 ounces of platinum to one ounce of gold after recently finding support at the important 2 level.

Having broken below $26/oz and its 50-day moving average, silver is once again looking for support. Using Fibonacci retracements from the June low, it has so far managed to find support ahead of $23.40, the August low with further weakness pointing to $21.9 as the next level.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Rising Oil Short; Specs Left Blindsided in Natural Gas and Coffee

Saxo Bank publishes two 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.

This summary highlights futures positions and changes made by speculators such as hedge funds and CTA’s across 24 major commodity futures up until last Tuesday, September 15.

The Bloomberg Commodity Index rose by 0.6% with price gains seen in all but four of the 24 major futures market tracked in this report. The change was in response to a weaker dollar, improved risk sentiment as U.S. mega cap stocks bounced and not least continued strong demand from China where some key economic data surprised to the upside.

Rising prices saw hedge fund demand for commodities resume with all sectors apart from energy and softs seeing net buying with the total net-long rising by 4% to 1.84 million lots. The grain sector led from the front with corn and the soybean complex continuing to see strong buying interest while all metals led by copper and gold were bought.

Energy

Position changes across the energy sector were particularly interesting, not least considering some of the market developments that unfolded following last Tuesday. Crude oil was mixed with a 25.9k lots increase in WTI and a 39.9k reduction in Brent reducing the combined long by 3.5% to 376.7k lots, a five-months low. This before Saudi Arabia’s warning to OPEC+ cheaters and short-sellers helped oil to its best week since June. Since July when fundamentals, but not the oil price, started to weaken, the gross short held by funds in WTI and Brent crude has more than doubled to reach 248k lots.

It was this development that the Saudi oil minister saw as a worry but also an opportunity to force the price higher through short-covering. While short sellers may move the market for a short period of time, fundamentals will always be the main driver. And while the recent 15% correction in Brent crude oil helped to bring the price more in line with current fundamentals, a recovery from here needs more than verbal intervention, despite it coming from the world’s biggest producer.

Natural gas bulls found themselves caught on the wrong side of the market after increasing their net-long in four Henry Hub deliverable futures and swap contracts to the 325k lots, the highest since May 2017. Lower demand triggered by lockdowns and Hurricane Sally disruptions impacting both demand and exports helped drive a bigger-than-expected weekly inventory build, As a result the price cratered before finding support at a key technical level below $2/MMBtu.

Metals

Despite being stuck in neutral, gold and silver bulls added length to both contracts. Signs of an improved outlook for platinum helped drive a near doubling of the net-long to 11.5k lots. Copper buying continued with the price being supported by strong Chinese demand and falling global inventories. The net long reached 76.7k lots, the highest since June 2018.

In our latest Commodity Weekly, we described gold as being passive given that most of the recent price impact has come from its current and unusual  positive correlation to the risk appetite being dictated by U.S. mega-cap stocks. Correlations, often picked up and strengthened by algorithmic trading systems, work until they don’t. With this mind an interesting week awaits given the risk of a deeper stock market correction following Friday’s week close on Wall Street.

Precious and industrial metals

Agriculture

The grain sector led by corn and the soybean complex continues to be bought, thereby defying the seasonal trend which tends to see crops being sold ahead of U.S. harvest. The top global buyer China continue its record pace of soybeans buying as it seeks supplies to feed a post African swine fever rebuild of its massive hog herd.

Key U.S. crop futures

Soft commodities were mixed with the sugar long being reduced for a second week while the Arabica coffee net-long reached the highest since November 2016. This before suffering its worst week in 22 years on reports that warehouses in Brazil, the world’s biggest grower and exporter, have never been this full. Lockdowns and the work-from-home phenomenon keeping consumers away from cafes and restaurants.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Gold too Passive, Risks Deeper Correction

What is our trading focus?

XAUUSD – Spot gold
XAGUSD – Spot silver
XPTUSD – Spot platinum
XAUXAG – Gold-Silver ratio
IGLN:xlon – iShares Physical Gold
ISLN:xlon – iShares Physical Silver
IPLT:xlon – iShares Physical Platinum


Gold as well as silver and platinum have seen renewed weakness following yesterday’s FOMC meeting. This after Fed chair Powell, as expected so close to the US elections, refrained from announcing new measures to stimulate and support an economic recovery which he described as still being highly uncertain. While the Fed has promised rock-bottom rates for longer than three years, the across market reaction with lower stocks and a stronger dollar, have raised some concerns that the Fed’s tool box has started to look empty with the element of surprise no longer there.

Gold’s post-FOMC reaction has mirrored the developments seen in weaker stocks and a stronger dollar. It shows that precious metals for now instead of being a safe-haven asset, chase the alternating risk sentiment being reflected through these key markets.

While U.S. ten year real yields, a key driver for gold, continue to stabilized around -1%, the short-term market direction is likely to be dictated by stock and currency market developments. Especially a break in the Nasdaq below 11,000 and a stronger dollar against the euro below €1.17 could increase the risk of a deeper correction in gold than the one seen already down to $1900/oz.

The rising inflation theme that in recent months helped drive demand for gold and inflation protected bonds have started to fade somewhat in recent weeks. This after seeing forward inflation projections move lower after reaching a cycle high at the end of August. Countering this potential short term headwind for gold, it is our worry that the optimistic views on when a vaccine against Covid-19 will be become widely available are too optimistic. With the case count continuing to rise around the world, recently also in the U.S., the global economic recovery look set to slow over the coming months.

With these developments and the potential for a very ‘ugly’ U.S. elections period ahead, we maintain our bullish outlook for gold. In the short-term however the performance of U.S. mega-caps and the dollar hold the key to the direction. As a result we are likely to see the two month consolidation period being extended further.

Gold remains stuck in the $1900’s with local support at $1937/oz ahead of the key $1900/oz level. Three previous lower highs point to fading upside momentum with the market in need of a break above $1200/oz to neutralise it.

Source: Saxo Group
Source: Saxo Group

Turning our attention to silver we have seen little in terms of fresh input to the market with most of the recent price action being dictated by mentioned outside markets. It is currently stuck in a $26/oz to $27.50/oz with no major changes seen in its relative value versus gold where the XAUXAG ratio has traded in a very tight range around 72 ounces of silver to one ounce of gold.

Source: Saxo Group

Platinum has rallied strongly since the World Platinum Investment Council last week changed its 2020 outlook from a supply surplus to a deficit. Having tried for a couple of days to break a key level against gold it also got hit by profit taking following yesterday’s FOMC meeting. Trading at a discount close to 1000 dollars to gold the metal has yet to challenge the recent highs which are $1005/oz and $1040/oz. For that to happen the XAUXPT ratio probably needs to break below 2, a key area of support where platinum’s further advance has been scuppered on several occasions since May (see small insert chart).

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Funds Dumping Oil and Fuel Products

Saxo Bank publishes two 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.

This summary highlights futures positions and changes made by speculators such as hedge funds and CTA’s across 24 major commodity futures up until last Tuesday, September 8. The week covered the first major US stock market correction since the March pandemic low. The risk off spread to the other sectors with the dollar rising by 1.2% while the Bloomberg Commodity Index dropped by 3% with heavy losses seen across the energy sector.

Responding to these developments, hedge funds were selective in their approach to the different sectors. A major reduction in bullish bets on crude oil and fuel products was somewhat off-set by the continued buying of several agriculture commodities, most noticeable soybeans, corn and coffee. Overall the net long across 24 major commodity futures was reduced for the first time in 12 weeks by 8% to 1.8 million lots.

Energy

A 13% price drop in the week to September 8 saw funds reduce the combined net-long in Brent and WTI by one-quarter to 390,655 lots, the lowest since April. Short-selling on both contracts jumped with the gross short in WTI reaching 109,683 lots, a level last seen before the historic price crash in late April.

Many speculators react mostly to price developments without too much focus on underlying fundamentals. On that basis, a break below the uptrend from June was required before the price finally moved lower to bring it more in line with weakening fundamentals.

The recovery in global energy demand continues to show signs of stalling. Many countries around the world, especially in Europe and Asia, are now in the midst of a second wave of coronavirus. As a result, the recovery in fuel demand has stalled with work-from-home and the lack of leisure and business travel – both signs that it will take longer than anticipated to get back to the pre-virus level of energy consumption.

Energy

Metals

A quiet week in metals despite stock market weakness and the stronger dollar. Gold bulls added 2% to their net long while silver saw a 5% reduction in response to a near 6% drop in the price. One note of interest was the 41% reduction in the platinum net long to just 6k lots, not far from the April low.

This just before the WPIC in their quarterly outlook changed their 2020 outlook from a surplus to a deficit, citing Covid-19 impact on supply from South Africa and increased investment demand for hard assets.  HG Copper had a quiet week with no change in either the price or the net long which remains elevated near a two-year high.

Precious and industrial metals

Agriculture

The grain sector continued to see strong demand for beans and corn while CBOT wheat longs were scaled back ahead of a monthly report from the U.S. Department of Agriculture on Friday. The combined long in the three major crops reached 231k lots compared with a five-year average short of 143k lots.

The grain sector has seen strong gains during the past month as U.S. weather concerns and strong Chinese demand all having helped create a bullish backdrop. The World Agriculture Supply and Demand Report on Friday confirmed the bullish outlook for corn and not least soybeans which reached the highest level since December 2017, corn finished higher while wheat dropped.

Key U.S. crop futures

Soft commodities were mixed with the ethanol link to crude oil driving a 12% reduction in the sugar long while cocoa and coffee continued to be bought. The Arabica coffee long reached a near four year high at 48,450 lots.

Soft commodities

 

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Unchanged Dollar Short During Week of Price Strength

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

This summary highlights futures positions and changes made by speculators forex, bonds and stocks up until last Tuesday, September 8. The week covered the first major US stock market correction since the March pandemic low. The Nasdaq 100 lost 10% and the S&P 500 5.5% during a week where US megacap stocks took a beating. The risk off spread to the other sectors with the dollar rising by 1.2% while bonds held steady.

Speculators kept an unchanged bearish dollar bet in the week to September 8. This despite broad dollar gains as the US stock market correction reduced the general level of risk appetite. The net short against ten IMM currency futures and the Dollar Index stood at $33.6 billion with the most noticeable changes offsetting each other being buying of GBP and CAD and selling of JPY.

One interesting observation was the lack of reaction to the stronger dollar from speculators holding a near record euro long at 197k lots (€24.5 billion). During the week both long and short positions saw a small reduction which left the overall net unchanged.

Leveraged fund positions in bonds, stocks and VIX

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.
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For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Platinum on Top as Gold Consolidates; Crude Remains Under Pressure

The Bloomberg Commodity Index, which tracks a basket of major commodities spread evenly across energy, metals and agriculture, traded lower for a second week. Risk appetite, as seen through the behavior among U.S. megacap stocks, has received a setback following the flurry of activity during July and August. This development, combined with a dollar that has stopped falling, rising coronavirus cases and concerns about the timing of a vaccine, have all played a part.

The hardest hit during the past week was the energy sector, which amid rising signs of wavering fuel demand, began seeing the price of oil and fuel adjusted lower to better reflect current fundamentals which are showing signs of weakening. The grains sector maintained strong momentum ahead of Friday’s U.S. Government report, which was expected to confirm a lower production due to adverse weather and lower ending stocks as a result of very strong demand from China.

Precious metals continued their consolidation within a relatively wide range, with gold and silver trading higher on the week. Signs of deteriorating relations between the U.S. and China, together with continued demand for inflation hedges as seen through the strong demand for gold via exchange-traded funds, helped to offset headwinds created by the general reduction in risk appetite.

At the top of the table this week we find platinum, which normally operates in gold’s shade. In their latest quarterly update the World Platinum Investment Council (WPIC) revised their 2020 outlook from a surplus to deficit. In it, they explain the changes caused by the pandemic which have reduced access to recycled material as well as supplies from South Africa, the world’s biggest producer – adding to heightened global risk which they, as well as Saxo Bank, expect will continue to drive investor demand for hard assets.

Platinum has, since the diesel scandal a few years ago, seen its spread to gold go from a premium to the current discount of more than 1000 dollars per ounce. While gold has reached a record high, platinum as well as silver (another semi industrious metal) remain well below their record highs. Platinum hit a $2300/oz peak in early 2008 before collapsing 68% during the Global Financial Crisis later that year.

From an investment perspective, platinum’s biggest challenge remains its lack of liquidity, being a much smaller market than gold. This is one of the likely reasons why it, despite an improved outlook, has seen a muted demand from asset managers who operate in sizes which platinum would struggle to manage.

The key area of resistance is currently between $1000/oz and $1040/oz where it has been rejected on several occasions during the past three years.

Source: Saxo Group

Agriculture

The grain sector has seen strong gains during the past five weeks with weather concerns, the weaker dollar and strong Chinese demand all having helped create a bullish backdrop. The combined long in Chicago traded corn, wheat and soybeans futures reached 214,000 lots during the week to September 1, some 325,000 lots above the five-year average seen for this period. This is interesting, because it is normally a time of year when funds tend to be net sellers given the lack of unknowns ahead of the arrival of the new harvest.

With these developments in mind, the market was looking ahead to Friday’s monthly update on production, yields and stocks from the U.S. Department of Agriculture. In the World Supply and Demand Estimates (WASDE) – released after writing this – grain traders were looking for data to support the recent strong rally and elevated longs across the sector.

Source: Saxo Group

Crude oil remains under pressure from weaker fundamentals as the recovery in global energy demand continues to show signs of stalling. Many countries around the world, especially in Europe and Asia, are now in the midst of a second wave of coronavirus. As a result, the recovery in fuel demand has stalled with work-from-home and the lack of leisure and business travel – both signs that it will take longer than anticipated to get back to a pre-virus levels of energy demand.

During the period of sideways trading since June, data from the physical market had begun sending signals that the price and current fundamentals were moving out of sync. Among others, we have seen a rising contango with spot prices trading at a deepening discount to the next month(s) as storage tanks fill up in response to weak refinery margins, primarily due to an overhang of unwanted diesel and jet fuel. These developments have led to rising demand for tankers toward floating storage trades, while Saudi Arabia has reduced its official selling price for October as demand from key customers such as China begin to weaken.

What it took for the correction to occur was a deterioration in the overall risk appetite as seen through the correction in U.S. (tech) stocks and the dollar being bought. In Brent crude oil, the break of the uptrend from June was the technical trigger, which finally kicked off a move to bring price and fundamentals more in line.

We do not believe that we will see a new dramatic sell-off in crude oil, but have to accept that the coronavirus and doubts about the timing of a vaccine may continue to delay until next year the recovery back towards $50/b on Brent crude oil. The slowing recovery in demand will challenge the resolve of the OPEC+ group which in hindsight increased production before demand had recovered enough to absorb the additional barrels.

Fundamental oil market guidance will be provided by OPEC and the International Energy Agency when they publish their monthly oil market reports on September 14 and 15 respectively.

Brent has found support at its 100-day moving average at $39.50/b but with speculators only just having started to reduce bullish bets, the correction may take it down to towards $36.50/b before support can be established. The general level of risk appetite through stocks and the movement of the dollar will continue be a key source of inspiration for traders.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Crude Oil Adjusting to Weakening Fundamentals

What is our trading focus?

OILUKNOV20 – Brent Crude Oil (November)
OILUSOCT20 – WTI Crude Oil (October)


Crude oil remains under pressure from weaker fundamentals as the global energy demand recovery shows sign of stalling. Many countries around the world, especially in Europe and Asia are now in the midst of a second coronavirus wave. As a result the recovery in fuel demand has stalled with work-from-home and lack of leisure travel both signs that it will take longer than anticipated to get back to pre-virus levels of energy demand.

Data from the physical markets such as weaker time spreads as the spot price weakens faster than deferred months, weak refinery margins primarily due to an overhang of unwanted diesel and jet fuel, lower of cost of shipping oil and reduced demand from China, the worlds biggest buyer, have for the past month increasingly been highlighting the risk of correction.

What it took was a deterioration in the overall risk appetite as seen through the correction in US (tech) stocks and the dollar being bought. In Brent crude oil, the break of the uptrend from June was the technical trigger which finally kicked of a move to bring price and fundamentals more in line.

We do not believe that we will see a new dramatic sell-off in crude oil but have to accept that the coronavirus and doubts about the timing of a vaccine may continue to delay until next year, the recovery back towards $50/b on Brent crude oil. The slow(ing) recovery in demand will challenge the resolve of the OPEC+ group which in hindsight increased production before demand had recovered enough to absorb the additional barrels.

Brent has found support at its 100-day moving average at $39.50/b but with speculators only just having started to reduce bullish bets, the correction may take it down to towards $36.50/b before support can be established. The general level of risk appetite seen through stock market developments and the movement of the dollar will continue be key sources of inspiration for traders.

Fundamental oil market guidance will be provided by OPEC and the International Energy Agency when they publish their monthly oil market reports on September 14 and 15 respectively. The EIA released its Short Term Energy Outlook yesterday and while saying that US oil production will shrink by 860k b/d in 2020, they also highlighted the incredible difficulty in providing forward guidance given the continued uncertainty about the demand outlook.

Delayed by a day due to the Labor Day holiday on Monday, the Energy Information Administration will publish its “Weekly Petroleum Status Report” at 15:00 GMT. The report covering the week to September 4 will be less distorted than recent updates as the impact on production, refinery activity and trade from Hurricane Laura continues to fade.

Yesterday’s sharp rebound in crude oil was halted after the American Petroleum Institute said that US crude stocks rose by 3 million barrels last week. If confirmed by the EIA it will be the first rise in seven weeks. Occurring right at the end of the summer driving season may raise concerns about a renewed stock pile build on weaker than normal consumption due to Covid-19 and reduced demand from refineries entering maintenance.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Gold Tests Support on Dollar Turnaround

What is our trading focus?

XAUUSD – Spot gold
XAGUSD – Spot silver
XAUXAG – Gold-Silver ratio
IGLN:xlon – iShares Physical Gold
ISLN:xlon – iShares Physical Silver


In our latest precious metals update from Tuesday titled “Precious metals pop higher as dollar extends slump” we highlighted the reasons for maintaining a positive outlook for precious metals. It was the day when the EURUSD challenged €1.2000 while US real yields where hitting fresh record lows.

In it we wrote: “Gold is once again taking aim at the psychological $2000/oz level above which the price has only closed five times back in early August. The trifecta of dollar weakness, falling real yields and the general level of risk appetite should potentially already have seen it back above that level. Perhaps a sign that the period of consolidation may extend a bit further before the price eventually mount a challenge at $2000/oz and the next level of resistance at $2015/oz.”

Fast forward a couple of days and the dollar has reversed sharply higher with a record EURUSD long through futures starting to get squeezed. This after European Central Bank’s Lane confirmed that the bank was uncomfortable with a strengthening euro, thereby potentially signaling a line in the sand at €1.20. The dollar strength that followed has stopped the commodity sector in its bullish track with corrections emerging in crude oil, copper and some agriculture commodities.

With gold having failed to benefit from the mentioned tailwinds earlier in the week the short-term outlook could potentially turn a bit more challenging. Apart from tomorrow’s US job report, the focus will stay with the dollar and its short-term direction.

On the euro, John Hardy wrote this in today’s Market Quick Take: “The big levels to the downside are the 1.1700 area range low (and notable Fibonacci retracement) and the absolutely critical 1.1500 area, which was a major cycle resistance on the way up and effectively the secular trend support. The price action could prove jumpy until the other side of the ECB meeting next Thursday, where the pressure is on for the ECB to act after a record low CPI print for August.”

As per the chart below the three lower highs is a concern and it may signal the need for a deeper correction as short term longs exit the market looking for better entry levels. The levels to look out for in terms of support are:

$1927/oz – Today’s low and trendline support from the June low,
$1900/oz – The 50-day moving average and recent lows,
$1837/oz – The 38.2% retracement of the March low to August high

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Precious Metals Pop Higher as Dollar Extends Slump

What is our trading focus?

XAUUSD – Spot gold
XAGUSD – Spot silver
XAUXAG – Gold-Silver ratio
IGLN:xlon – iShares Physical Gold
ISLN:xlon – iShares Physical Silver


Gold has entered September in buoyant mood as it continues its rebound towards $2,000/oz. The combination of a weaker dollar, lower real yields and the US Fed Vice Chair Clarida talking about yield-curve control (YCC) are the key drivers behind the latest move higher.

Widely considered influential in setting the Fed’s policy, Clarida was more specific in discussing an eventual yield-curve-control policy in a speech yesterday than was Fed Chair Powell in a major speech last week. He said that while conditions for YCC were not “warranted” at the present time, it “should remain an option that the committee could reassess in the future if circumstances changed markedly.”

Whether for this or for other reasons, the USD dropped to broad new lows, especially against the Euro where speculators through futures have accumulated a record short. While US ten-year yields  remained range-bound as per the chart below, the underlying components of real yields and breakevens continues to move in their separate and gold supporting ways.

Today the 10-year US real yield touched a record -1.1% today while inflation expectations as seen through the breakeven rate has reached a 16-month high at 1.82%.

The Gold-Silver ratio (XAUXAG) which measures the value of one ounce of gold in ounces of silver has dropped to 69, the lowest since 2017. The renewed out performance occurred in response to a supportive rally in copper which reached $3.0945/lb in Asia after China reported a better-than-expected Caixin PMI Manufacturing data.

In addition to these growth positive news copper has now for several weeks been supported by tight supplies at warehouses monitored by the major futures exchanges together with the weaker dollar, not least against the Chinese Renminbi which has rallied to a 15-month high at 6.82.

Gold is once again taking aim at the psychological $2000/oz level above which the price has only closed five times back in early August. The trifecta of dollar weakness, falling real yields and the general level of risk appetite should potentially already have seen it back above that level. Perhaps a sign that the period of consolidation may extend a bit further before the price eventually mount a challenge at $2000/oz and the next level of resistance at $2015/oz.

The underlying demand remains firm with the pension funds and real asset managers around the world increasingly waking up to the need for inflation protection. Not because inflation is an issue but just as much because they don’t want to be left without when and if inflation becomes an even bigger theme than now.

Our positive view on precious metals remain unchanged and has if anything been strengthened by the latest developments. The biggest risk to the bullish narrative remains the risk of corrections hitting key markets such as the dollar and stocks. A stronger dollar would reduce the tailwind while a sudden stock market correction may drive the need for cash, something gold liquidation can provide.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Dollar Bears Putting Their Eggs in One Basket

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

This summary highlights futures positions and changes made by speculators in forex, bonds and stocks up until last Tuesday, August 25. A week that saw a continued rally in U.S. stocks with the S&P 500 adding another 1.6%. The dollar rose for a second week while bonds held steady ahead of Fed chair Powell’s speech last Thursday.

Following a brief pause, speculators resumed their dollar selling during the week to August 25, a week where the Greenback actually recorded broad gains against the ten IMM currency futures and the Dollar Index tracked in this. The net dollar short rose by $2.6 billion to reach $34.8 billion and we have to go back more than nine year to find a similar level of aggressive dollar selling.

As per the table below it is however clear, that speculators increasingly have put all their eggs in one basket and bet on further strength of the euro. The euro net-long reach a fresh record of 211,752 lots, the equivalent of €26.5 billion. The increase was primarily driven by short sellers throwing in the towel after the gross short saw a 11,992 lots reduction to a nine-year low at just 50,309 lots.

Elsewhere additional buying of the JPY and continued short covering of the CAD made up the rest of the buying while some selling of CHF and GBP reduced the overall impact.

Leveraged fund positions in bonds, stocks and VIX

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.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Gold Update: What to Look for in Powell’s Speech

What is our trading focus?

XAUUSD – Spot gold
XAGUSD – Spot silver
XAUXAG – Gold-Silver ratio
IGLN:xlon – iShares Physical Gold
ISLN:xlon – iShares Physical Silver

Gold and with that also silver’s fixation on yield and interest rate developments will reach a climax later today when Fed chairman Jerome Powell delivers his long awaited speech at the Kansas City Fed’s “virtual Jackson Hole” symposium.

The speech which will have an expected length of 45 minute has been labelled as potentially significant, with central bank watchers poring over Powell’s every word for confirmation of dovish ramifications and clues on the outcome of the year-plus monetary policy framework review.

My colleague Eleanor Creagh posted this update earlier called “Awaiting Jackson Hole”. In it she highlights the key themes to look out from a market and precious metal perspective.

Following a brief period of dollar strength yesterday, which drove gold and silver lower, both managed to find support and bounce from key support levels at $1900 and $26. The recovery was supported by ten year break-even yields reaching a seven-month high while real yields slumped back below -1% to the current -1.06%. At present, the Federal Reserve is widely expected to keep short-term interest rates near zero for five years and the market will be looking for confirmation.

Gold is currently stuck in a tightening range between $1900 and $1955. A break below could see it target $1800 while above the metal could once again be targeting $2000 and beyond.

Inflation and the protection against inflation continues to move up asset managers to-do list. With policy makers having discussed a more relaxed approach to inflation the market will be focus intensely on any comment related to this topic. The Fed’s preferred measure of inflation has consistently fallen short its 2% target, averaging just 1.4% since 2012.

Allowing inflation to rise while preventing bond yields from moving higher would be the Goldilocks scenario for precious metals. It would likely lead to an even bigger drop in the mentioned U.S. real yield, a key source of support for gold and silver in recent years.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Crude Oil: U.S. Gulf Coast in Focus Ahead of Laura’s Landfall

What is our trading focus?

OILUKOCT20 – Brent Crude Oil (October)
OILUSOCT20 – WTI Crude Oil (October)
GASOLINEUSSEP20 – RBOB Gasoline (September)

Crude oil and RBOB gasoline both trade close to a five-month high with the focus having moved from the pandemic impact on demand versus OPEC+ production cuts to the U.S. Gulf coast. Hurricane Laura which has been upgraded to a potential catastrophic category 4 storm, is due to slam into the Texas and Louisiana coastline within the next 24 hours. While she undoubtedly will cause a great deal of damage, energy prices have so far reacted calmly to these developments.

The Houston to Beaumont area holds a lot a refinery assets and during the past 24 hours the trajectory of the storm has moved further east which means that this, from an oil market prospective, important area will now be on the less violent left side of the hurricane.

According to reports more than 84% of oil output from the Gulf of Mexico has now been shut, while almost 3 million barrels/day of refinery capacity has been closed as well.

Source: Wunderground.com

The temporary closure of refineries leading to less supply of products, together with potential storm and flood damage, has given gasoline prices an 8% boost since Friday. So far today, however the price trades down 1% after hitting $1.40/gal overnight before the changed trajectory helped attract some profit taking. The price rally has been cushioned by two Covid-19 related developments. US motorist are using 10% less gasoline than a year ago while inventories remain some 15 million barrels or 6.5% above the five-year average.

Depending on developments over the next 24 hours, a post hurricane round of profit taking could see the price retest the recent breakout zone just below $1.33/gal

Source: Saxo Group

WTI crude oil, up by less than 2% this week, has so far struggled to find a bid. While production from the Gulf of Mexico has been cut by more than 84% refinery demand has slumped by even more. With this in mind it is perhaps not that surprising to see WTI struggling to find a bid despite finally having broken above resistance at $43/b. So far the price has made it no further than $43.50/b, the early August high.

It highlights and in our opinion support the view that crude oil may struggle, at least in the short-term to rally much further. The pandemic is currently gathering momentum across Asia and Europe and while renewed lockdowns are unlikely, the impact on fuel demand is being felt. OPEC+ at the same time are struggling to reign in more than 2 million barrels/day from countries that have yet to reach agreed production targets.

A break below $43/b carries the risk of long liquidation taking the price lower towards $41/b and potentially as low as $38.5/b, the July 30 low.

Source: Saxo Group

Later today at 14:30 GMT the U.S. Energy Information Administration will release its ‘Weekly Petroleum Status Report’. A price supportive drop in both crude oil and gasoline stocks was reported by the American Petroleum Institute last night. But whether a confirmation from the EIA this afternoon will create additional market reaction remains doubtful given the current focus on Hurricane Laura and the discrepancies she will create in data over the coming weeks.

As per usual I will publish the results of the report on Twitter handle @Ole_S_Hansen

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Crude Oil Looks to OPEC+ and EIA for Inspiration

What is our trading focus?

OILUKOCT20 – Brent Crude Oil (October)
OILUSSEP20 – WTI Crude Oil (September)
XOP:arcx – Oil & Gas Exploration & Production
XLE:arcx – Energy Select Sector SPDR Fund (Large-cap US energy stocks)


Crude oil’s inability to respond to economic data and specific oil market news has seen both WTI and Brent crude oil continue to trade sideways within a narrowing range. The stability seen at a time where the OPEC+ group of producers have turned up their taps, has been taken as good news by some while others worry about crude oil’s inability to move higher in response to the recent dollar weakness and continued stock market strength.

The rangebound oil market has also seen the recovery in large-cap U.S. energy stocks stall with the SPY:arcx having outperformed the XLE:arcx by 15% since early June, when the impressive rally from the April low began to stall as WTI moved above $40/b.

Six days in a row WTI has now been rejected at $43 with the move above its 200-day moving average failing to trigger any technical buying interest. Support, as can be seen on the chart below, continues to move closer with the levels to look out for being trendline support at $41 followed by $40.35, the 50-day moving average.

Source: Saxo Group

Both crude oil contracts once again failed to receive a bid from the general risk appetite being signaled yesterday through a weaker dollar and a new high in the S&P 500. While not expected to be a market moving event, the market nevertheless awaits the outcome of today’s OPEC+ committee meeting. The Joint Ministerial Monitoring Committee (JMMC) will analyse and discuss the latest oil market developments.

They a likely to refrain from making any major announcement at a time where pandemic related demand concerns continue to off-set improved economic data among key consumers.

They will also be keeping a close eye on U.S. shale oil producers and take comfort from the fact that a sharp fall-off in well completions could see production fall even further from its current 10.7 million barrels/day before eventually stabilizing.

Instead, the group will continue to maintaining discipline while applying pressure on those countries that have yet to reach their agreed production targets. Not least considering news that Libya potentially could resume some crude oil exports after its eastern commander Khalifa Hafar said ports closed since January can reopen. Libya’s oil production has slumped from 1.2 million barrels/day last year to the current 90,000 barrels/day.

Increased pressure on Iraq and Nigeria to make further cuts with the prospect of additional barrels coming from Libya over the coming months

Also today at 14:30 GMT, the ‘Weekly Petroleum Status Report’ from the U.S. Energy Information Administration. With crude oil stocks expected to continue their seasonal reduction, the focus may instead turn to gasoline. It is the worst performing contract today after the American Petroleum Institute said gasoline stocks rose by an uncomfortable large and counter seasonal 5 million barrels last week.

As per usual I will post results and charts on my Twitter handle @Ole_S_Hansen

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Metals Sold with Rising Yields Posing a Threat

Saxo Bank publishes two 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.

This summary highlights futures positions and changes made by speculators such as hedge funds and CTA’s across 24 major commodity futures up until last Tuesday, August 11. It was a mixed week in terms of market action with another dose of vaccine hopes and better-than-expected economic data supporting a 0.9% rise in the S&P 500 to move within a whisker of its February record.

A 13 bp rise in U.S. 10-year yields and a removal – using Fed Funds futures – of the risk that the Fed will move towards a negative-rate policy, helped trigger profit taking across interest rate sensitive sectors, such as precious metals. The Dollar index rose by 0.3% with a record euro long raising concerns about a correction, not only in forex but also among commodities sensitive to sudden dollar strength.

The Bloomberg Commodity Index dropped 1% during the week to August 11 with rising bond yields and a stronger dollar reducing the appeal, not least for metals from gold and silver to copper. Fifteen out of 24 the commodity futures tracked in this report traded lower while speculators, despite the weakness, added risk in a majority of the contracts. Most noticeable Brent crude oil, natural gas, soft commodities and livestock. Biggest reductions were seen in WTI crude oil, gold, silver, copper, soybeans and wheat.

Energy

The combined crude oil net-long rose by 4,4k lots to 546k lots with a 12.7k lots reduction in WTI crude oil being more than off-set by a 17,1k lots increase in Brent crude oil. Following the April to June surge, both crude oil contracts have been stuck in a slight upward trending channel. Thereby causing no concerns for funds, who have made only small changes to their position since early June. Last week both contracts spent most of week challenging the upside, but with limited success as the 200-day moving average in WTI, last at $42.7/b, provided a line the market could not break.

The natural gas long across four Henry Hub deliverable futures and swap contracts rose by 12% to reach 293k lots, the highest since November 2018 and the seasonal highest level going back at least ten years. U.S. natural gas futures rose to an eight-month high last week on speculation, that a record heat across the western half of the country, will stock increased demand from utilities which would help reduce stockpiles towards their long-term average.

Metals

Two weeks of gold and silver selling became three last week when both metals suffered a long overdue correction, triggered by vaccine hopes, better-than-expected US data, a stronger dollar and not least rising real yields. This following a four-week surge where gold rallied by 15% and silver by 57%. The net longs dropped to an eight-week low after speculators cut the gold net-long by 13.5% to 150k lots and the silver by 27% to 23k lots.

The rising volatility in gold futures spreads and the dislocation to spot gold traded in London have been cited as reasons why funds have moved long exposure from COMEX gold futures (tracked in this report) into Exchange-traded funds instead. The continued reduction in net-longs, however are a potential cause for concern from a gold bullish perspective.

With the brightest minds shunning both metals despite a catalogue of bullish drivers, it may be time to consider the risk of a prolonged period of consolidation/correction. At least in the short-term while economic data continues to improve, the dollar short looking stretched and the U.S. yield curve show signs of steepening.

We have not changed our long-term bullish view on gold and silver, but also have to accept that the trade, especially through non-leveraged ETF’s, has become very crowded, thereby raising the risk of increased two-way action.

We have not changing our long-term bullish view on gold and silver, but also have to accept that the trade, especially through non-leveraged ETF’s, has become very crowded, thereby raising the risk of increased two-way action.

The elevated HG copper long was reduced for a second week as the metal stopped rallying after finding resistance at $3/lb. The net-long was reduced from a two-year high, this time by 12% to 47.4k lots.

Agriculture

Weakness before the bullish received WASDE report last Wednesday saw funds cut their net-long in soybeans by 39% while returning to a net short position in wheat. The corn net-short was unchanged but remained the biggest short held by funds across the commodities we track. This before a strong end of week rally after a price friendly WASDE report, bigger than expected unplanted acreage and wind storm damage impacting the potential crop outlook.

Soft commodities were all bought with net long positions currently held in all four contracts. The increase, primarily due to short covering, occurred despite weaker price action during the week. Especially coffee which sank by 8% but still saw the net-long rise by 45% to 23.8k lots.

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.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Crowded Euro Long Posing a Threat to Dollar Bears

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

This summary highlights futures positions and changes made by speculators forex, bonds and stocks up until last Tuesday, August 11. A mixed week in terms of market action with another dose of vaccine hopes and better-than-expected economic data supporting a 0.9% rise in the S&P 500 to move within a whisker of its February record.

A 13 bp rise in U.S. 10-year yields and a removal – using Fed Funds futures – of the risk that the Fed will move towards a negative-rate policy, helped trigger profit-taking across interest rate-sensitive sectors, such as precious metals. The Dollar index rose by 0.3% with a record euro long raising concerns about a correction, not only in forex but also among commodities sensitive to sudden dollar strength.

Speculators increased their short dollar position to a fresh nine-year high in the week to August 11. The net short against ten IMM currency futures and the Dollar Index rose by 12% to $33 billion, the highest reading since May 2011. The rapid pace of selling has resulted in the dollar short position more than doubling during the past five weeks.

However, drilling into the numbers we are not, as opposed to recent weeks, finding broad selling of the Greenback. The vast majority of the short position is due to a continued expansion of the euro long which last week rose 11% to reach a new record of nearly 200,000 lots or €25 billion. Dollar selling was also seen against Sterling where 11,906 lots of buying lifted the net-short to just 2,821 lots, the least bearish in four months. Additional buying of the Swiss Franc increased the net-long to a nine-year high.

The dollar meanwhile was bought against JPY, CAD and AUD as the contraction in yield spreads and weaker commodities supported short covering in the JPY and additional short-selling of CAD and AUD.

Leveraged fund positions in bonds, stocks and VIX

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.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Crude Oil still Looking for a Break

What is our trading focus?

OILUKOCT20 – Brent Crude Oil (October)
OILUSSEP20 – WTI Crude Oil (September)
XOP:arcx – Oil & Gas Exploration & Production
XLE:arcx – Energy Select Sector SPDR Fund (Large-cap US energy stocks)


Our weekly crude oil update ahead of EIA’s Weekly Petroleum Status Report will be kept short to reflect the current market condition. Following the extreme volatility witness during the global lockdown back in March and especially April, the price of both Brent and WTI crude oil (chart below) have settled into a slightly rising channel.

Successful production cuts from OPEC+ ensured a strong rebound during May but since then the market has settle into a wait-and-see mode with easing production cuts so far meeting a pick-up in demand, strong enough to keep the market on a slight upward sloping trajectory. Adding to the support this past month has also been the weaker dollar and the continued level of raised risk appetite across market.

The market may also take some comfort from a recent pick up in ETF’s tracking oil and gas exploration and production. One of the biggest, the XOP:arcx broke above its 200-day moving average on Monday and is currently up by close to 10% on the month.

WTI crude oil is currently stuck within an ascending channel but close to a five-month high. Currently between $40/b and $44/b with the 200-day MA, which it has been battling for the past week, providing some local resistance at $42.8/b.

Monthly oil market reports from the EIA and OPEC – IEA due Thursday – have both been pointing to a slow recovery in global oil demand. OPEC in their report lowered global demand for 2020 by 9.1 million barrels/day with the latest surge in the coronavirus cases in the US as well as rising numbers in India, Brazil and Europe raising concerns while creating a difficult market to predict.

Speculative investment demand from hedge funds and CTA also reflects the lack of movement. For the past ten weeks, the combined net-long in Brent and WTI has stayed close to 550,000 lots (550 million barrels). This compared with a low of 183,000 lots in April and a 714,000 lots high in January, prior to the covid-19 outbreak becoming known outside of China.

Later today at 14:30 GMT, the U.S. Energy Information Administration will release its ‘Weekly Petroleum Status Report’. The higher prices seen today has been driven by the outlook for lower U.S. stockpiles. Not least after the American Petroleum Institute last night reported a 4 million barrel drop in crude oil stocks while products also saw bigger declines than expected in the surveys carried out ahead of the report.

If confirmed it will be the third weekly drop in crude stocks, but as the charts below highlight, we are not that many weeks away from the ending of the peak demand season. With crude and product stocks well above their seasonal average the market may struggle to digest negative surprises.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire