Copper’s Long-Term Bullish Potential Remains

Industrial metals continue to experience mixed fortunes with a noticeably gab emerging in the performance between copper and aluminum, the two bell weather metals in this sector. While copper remains stuck in a range, aluminum has continued to surge higher with the latest move higher being driven by the risk of supply disruptions of Bauxite, a key component in the production of aluminum.

Aluminum, one of the metals with the most bullish fundamentals, trades up 40% year-to-date and at $2790/tons on the London Metal Exchange, it has reached the highest price in 13 years. Already benefiting from a robust long-term outlook due to its role in the clean-energy transition, and China’s crackdown on emissions in its energy-intensive industries such as aluminum, nickel and steel, the latest jump has been driven by political unrest in Guinea, a key source of supply of bauxite, a feedstock used to make alumina, which is further processed into aluminum.

Guinea, sometimes called the Saudi Arabia of bauxite holds the world’s largest reserve with China, the biggest producer of aluminum sourcing more than half of its bauxite from Guinea. The latest supply worry adding upside pressure to a metal already driven by the prospects for strong demand increasing the visible deficit in China and the West.

Having tracked each other closely during the early parts of 2020, the noticeable slowdown in China during the past few months arrested the rally in copper while aluminum continued higher on the mentioned tight supply concerns.

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Dr. Copper, used in everything from wiring and electronics to electrical vehicles, and as such a good indicator of global growth and activity remains the go to industrial metals from investors and speculators seeking exposure to the sector. In addition, the ease of access to trading copper around the world, together with its relative deep pool of liquidity at the three main exchanges in New York, London and Shanghai, often sees the price of copper, not only react to copper fundamentals but also global economic developments.

Expected to be the future king of the so-called “green” transformation metals together with the fear of inflation, especially during the first few months of 2020, helped attract investment interest from speculators and investors. The buying culminated in May when the price surged to a record $10750/t on LME and $4.89/lb in New York, just before China announced measures to curb commodity prices in order to address surging factory gate costs.

On top of these measures to curb prices and speculative interest, copper also felt the impact of growth starting to cool into the third quarter as stimulus spending and the re-opening-fueled burst of activity slowed in both the US and China. Third quarter growth in the US has been revised sharply lower with one US bank calling for zero growth while another has halved its forecast from 6.5% to 2.9%. According the Citigroup economic surprise index, recent data from around the world has in general been trailing expectations, thereby supporting the view, that growth may be slowing while inflation still looks anything but transitory.

Again, with copper being the go-to metal for many so-called “paper” investors, it has suffered accordingly with speculators in HG copper having cut their net-long position by 65% since the February peak. However, having rallied by 148% from the 2020 pandemic low to the May 2021 high, the relatively small 18% correction seen since then highlights a market which in our opinion looks relatively cheap relative to the outlook for future demand growth.

China went through a destocking cycle during the first half and as they start to rebuild the call on LME monitored stocks may rise, thereby creating a more visible deficit. This at a time where demand in China remains relatively robust, and the rest of the world continues to move the agenda towards environmental friendly policies. Elevated demand expectations, especially from the push to electrify the transportation sector together with an absence of new mine investment is likely over the coming years to push the market into a deep and price supportive deficit.

The helicopter perspective shows a copper contract still lingering in a downtrend but which at the same time has managed to put in a double bottom around $3.95/lb. While we wait for a higher high, the risk of a deeper correction cannot be ruled out. Focus being the mentioned low and ultimately the 38.2% retracement of the 2020 to 2021 rally at $3.77/lb ($8300/t on LME). Timing is as usual crucial, but in our opinion copper remains a buy on fresh strength and on any potential additional weakness.

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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

EU Power Prices Surge on Reduced Gas Flows

European consumers, both private households and industry, have witnessed surging electricity and fuel bills during the past six months. The good news is that part of the rally has been triggered by increased demand, with Europe witnessing a growth sprint just like other regions of the world following last year’s pandemic-led shutdowns. The bad news relates to supply, which especially for natural gas has been in short supply during this period.

European power or electricity is derived from four major sources: combustible energy such as crude oil, gas and coal; nuclear power; hydroelectric power; and renewable energy such as wind and solar. As per the 2019 graph from Eurostat, Europe remains highly dependent on combustible fuels, which depending on the source requires the user to offset the generated pollution through the purchase of carbon emissions.

Eurostat
Eurostat

So far this year, Europe has been hit by an almost perfect storm of developments which have helped drive gas, coal, emissions and power prices to or near record levels. The biggest single contributor has been reduced flow of gas following a very cold winter which has helped deplete stock levels. During the second and third quarter in any year, excess gas imports from Norway and Russia, and to a lesser extent through shipments of LNG, are pumped into storage facilities across the continent to be used during the peak autumn and winter period.

Due to lower-than-expected gas imports from the three mentioned sources, especially from Russia, gas prices in Europe earlier this month hit a record with the Dutch TTF benchmark hitting €48/MWh, or more than double the ten-year average. Reduced flows and a scorching hot summer in Southern Europe has driven gas in storage some 20% below the five-year average to a ten-year low for this time of year, and with time to restock before winter running out, the risk of a supply crunch and elevated prices remains.

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Russia’s Gazprom, the national gas producer, is just weeks away from completing the controversial Nord Stream 2 pipeline, and once completed, gas could flow directly from Russia to Germany, thereby reducing flows on the main pipeline via Ukraine. This is a line that for years has provided Ukraine with a major source of revenues, and one of the reasons why the U.S. has been against the pipeline. Just recently, the US applied sanctions on two Russian entities involved in the gas link while German Chancellor Angela Merkel has offered reassurances that Ukraine would not suffer from the construction of the Nord Stream 2 pipeline.

The German energy minister has chipped in by saying Germany would not create obstacles while Ukraine said talks about its future as a transit country had been vague.

The latest twist in this saga has come today from Dusseldorf Higher Regional Court. It ruled that the Nord Stream 2 pipeline is not exempt from European rules that require the owners of pipelines to be different from the suppliers of gas to ensure fair competition. This ruling may further delay the starting time for when gas will flow

With gas prices in Asia also surging, arrivals of LNG shipments to Europe has slowed, thereby increasing further the continent’s reliance on Russian supplies. As a result of the reduced gas flows, European power producers have been forced to buy more coal and due the higher level of carbon emission, the cost of buying pollution offsets via the European Emissions Trading Systems (ETS) has risen to record levels near €60/tons.

The ETS started back in 2005, and today, it is by far the largest and most successful market. It’s a very liquid cap and trade system where the authorities set a cap for the maximum amount of carbon emissions that can be produced within an economy or region. The ETS is by now very well-established and carries a high degree of transparency. It covers roughly 40% of the greenhouse gas emissions (GHG) in Europe through sectors like utilities and industrials. Other sectors like agriculture, construction and transportation (including shipping) are currently not included, while some are expected to be included over the coming years.

In summary, the result of surging gas, coal and emissions prices this year has been surging electricity prices across Europe with record levels seen in Germany this past month. Several electricity intensive industries have seen their electricity bills rise by a factor two or even three. Given the political will to cut emissions through stealth is likely to propel emission prices even higher over the coming years, not least considering the prospect for additional industries being included.

In order to achieve such a massive emissions reduction, utilities, industry and other heavy polluters will increasingly be looking towards alternative low emission sources of energy. With this in mind there is little doubt that demand for power derived from renewable sources, which has yet to include nuclear, will only continue to rise.

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 Bought, Oil and Copper Sold on Virus Concerns

As a result the dollar strengthened, yields dropped while commodities traded lower, led by losses in energy and industrial metals while gold and most agriculture commodities saw net buying.

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 summary below highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, August 17. A week where continued focus on the risk of an earlier than expected unwinding of the Fed’s massive stimulus program, helped support a renewed growth to value rotations in stocks, a stronger dollar and somewhat surprising, lower bond yields.

The latter potentially driven by emerging risk adversity caused by the continued spreading of the delta coronavirus variant as well as weaker input cost through lower commodity prices.

A relative small decline in the Bloomberg Commodity index driven by another decline in both energy and industrial was partly offset by continued buying of grains and softs, as well as renewed demand for gold.

Commodities

The Bloomberg Spot index traded lower in the week to August 17, albeit only by 0.4% with losses in energy and industrial metals being partly off-set by strength across the agriculture sector and renewed buying of gold. The rotation resulted in the combined long across 24 major commodity futures holding unchanged at 2.2 million lots with the biggest reductions hitting Brent crude oil, natural gas and copper while strong demand was seen in gold, corn and cocoa.

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Energy

In response to continued Covid-19 demand worries, speculators cut their combined crude oil long in WTI and Brent by a total of 31.2k to 534k, a nine-month low. All energy contracts including natural gas saw net-selling.

Monday morning comment

Crude oil (OILUSOCT21 & OILUKOCT21)as well as most other commodities has started the week with gains in response to improved risk appetite, not least supported by a softer dollar. Last week’s slump, the worst in three years for oil, was driven by the delta variant, Chinese growth worries, and the prospect of reduced Federal Reserve stimulus.

While the virus remains a threat to the short-term demand outlook, despite signs of an improving situation in China, this week’s Jackson Hole summit may give the market some ideas about the timing of tapering (see below). Double bottoms have emerged in Brent at $64.50 and WTI at $62 while speculators cut bullish oil bets to a 9-month low in week to August 17.

Metals

The strong recovery that followed the August 9 flash crash helped drive a 52% increase in the speculative gold long to 77.6k lots while silver, troubled by its link to falling industrial metals, saw its net length slump to a 26-month low at just 9.7k lots. Copper’s worst slump in two months helped drive a second week of selling which saw the net long down 38% on the week to 20k lots. Platinum which recently had seen its discount to gold hit $800 from less than $500 last month saw a small amount of buying after speculators recently build the biggest net short in two years.

Monday morning comment

Gold has started the week relatively good shape after managing to shrug off last weeks dollar strength and renewed pick up in real yields. It however remains below the psychological important $1800 level, as the market adopts a wait-and-see approach as investors await Jackson Hole later this week for more insight into the Federal Reserve’s policy outlook. Silver (XAGUSD) has clawed back some of last weeks losses with the XAUXAG trading at 76.80 after hitting 77.75 a couple of trading sessions ago.

HG Copper (COPPERDEC21) continues to recover following last week’s slump on supportive signs from China where stock levels have fallen and local premiums above LME spot has risen in response to the government’s efforts to combat the recent virus outbreak. Also, the risk of strike related disruptions in Chile remains with a slew of mines undergoing contract renewal talks, with unions at two mines currently out on strike.

The sharp recovery from below $4/lb, now a double bottom,together with the long-term supportive outlook for copper has helped attract fresh buying and short covering. First level of resistance at $4.215 followed by $4.295.

Agriculture

Across-the-board buying of key crops helped lift the grains sector long by 45k lots to a ten-week high at 544k lots. The biggest exposure remains by far in corn followed by soybeans and increasingly now also wheat, with both Kansas and Chicago traded wheat seeing raised demand during the past few weeks. In softs, all contracts saw net buying led by sugar with the net long reaching a five-year high, and cotton which reached a three-year high at 82k lots. Cocoa flipped back to net long while coffee was bought despite trading lower on the week.

Forex

Speculators almost cut their recently established dollar in half during the week to August 17. The selling, however, was concentrated against the euro where an initial rejection at €1.17 and subsequent bounce to €1.18 helped drive a 70% increase ($3.5 billion equivalent) in the EUR net long to a five-week high at 57.6k lots. Longs that immediately got challenged by the renewed euro weakness towards the end of last week when general risk adversity helped strengthen the dollar back below €1.17.

With most of the other major currencies led by CHF, JPY and CAD seeing continued selling, the overall reduction in the net dollar long against ten IMM currency futures and the Dollar index was cut by $2.3 billion to $2.6 billion.

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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.

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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 and Silver Length Cut in Half; Agriculture Bought on Weather Woes

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 summary below highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, August 10. A week where hawkish comments from Clarida, the Fed vice-chair and strong jobs report saw markets starting to price in an earlier than expected unwinding of the Fed’s massive stimulus program.

These developments helped trigger a one percent increase in the Bloomberg Dollar index while ten-year inflation protected yields jumped 16 basis points just after hitting a record low. Stocks saw another growth to value rotation while commodities traded mixed with heavy selling in precious metals being partly offset by continued buying across the agriculture sector. Energy and industrial metals also suffering setbacks on demand concerns in response the continued spreading of the delta coronavirus variant.

Commodities

The Bloomberg Spot index lost 1% during the reporting week to August 10, as the continued spreading of the delta coronavirus variant in Asia and parts of the US raised concerns about demand for key commodities such as crude oil and copper. Investment metals slumped on rising yields and dollar while the agriculture sector remained to the go to sector with adverse weather across the world providing a boost to both grains and softs.

Overall, the total net long across 24 major commodity futures was cut by 4% to 2.2 million lots with selling of crude oil, gas oil, gold, silver, and copper being only partly offset by demand for sugar, soybeans, corn, and wheat

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Energy

Continued crude oil weakness saw speculators cut their net length in WTI and Brent for a second week to an eight-month low. This in response to demand worries caused by the rapid spreading of the delta coronavirus variant, not least in China were a relatively small number of cases has led to renewed shutdowns and restrictions on movements.

The combined long was cut by 48k lots to 566k, but just like the previous week reduction, the change was solely driven by long liquidation with no signs of appetite for naked short selling. Probably due to the belief the disruption will be transitory and that OPEC and friends, if necessary, will adjust production to support the price.

Monday morning comment: Crude oil trade lower for a third day with Brent back below $70after key oil consumer China released weaker than expected retail sales and industrial production data and following Friday’s very weak sentiment reading. These developments support IEA’s latest downgrade to demand for the months ahead as a resurgent delta coronavirus variant is impactingdemand across the world. Also, in the US there are signs shale producers are ramping up activities with the number after the number of rigs last week rose by 10 to 397, marking the biggest jump since April.

Metals

Speculators more than halved their gold and silver longs during a very troubling week for precious metals. The week covered a renewed rise in bond yields following Fed vice-chair Clarida’s hawkish comments and the strong jobs report culminating in last Monday’s flash crash. In response to these for metals adverse developments, the gold net length was cut by 52% to 51k lots while the silver length collapsed by 54% to just 12k lots, a fifteen months low.

Platinum, which during the week saw its discount to gold rise to $800 from an April low at $500 saw continued selling with the recently established net short more than doubling to a 13-month high at 9k. Rangebound copper was sold for a second week with the net long dropping 19% to 32k lots, thereby reversing half the buying seen since the June low at 19k lots.

Monday morning comment:

Gold finished last week on a firmer footing after a much weaker than expected University of Michigan sentiment (see below) helped deflate some of the buildup taper angst with Treasury yields and the dollar traded lower ahead of the weekend. Both paused their retreat overnight with gold and silver drifting lower as a result. A major band of resistance has emerged between $1790 and $1815 while support needs to hold around the $1750 area.

Following last Monday’s flash crash, speculators slashed their gold and silver net longs by more than 50% leaving the market exposed to fresh buying on a break higher. This week the market will be watching a speech by Fed chair Powell, as well as minutes of the Fed’s last meeting.

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Agriculture

Continued price gains across the agriculture sector helped drive another week of speculative buying in both grains and softs. Adding to the support was the grain market gearing up for an expected price supportive monthly supply and demand report from the US Department of Agriculture last Thursday. A report that turned out to justify the recent buying, not least in wheat which surged higher on weather related production reductions in the US, Canada and Russia.

The world is potentially facing a supply issue with high protein milling wheat used for human consumption in bread, and that explains why Paris Milling wheat and Kansas HRW wheat both trade higher by more than 10% this month. Overall, the net length in Chicago and Kansas wheat was increased by 10k lots to 64k, still substantially below the interest seen in corn (254k) an soybeans complex (180k)

Sugar is another highflyer due to lower supplies from frost and drought hit regions in Brazil, and news India, the world’s second largest shipper is considering diverting canes towards the production of biofuel to curb imports of increasingly expensive crude oil. The net length in raw sugar futures rose 7% to a five-year high at 265k lots. The cotton long reached a three-year high at 73k lots while the coffee long suffered a setback after the price retraced from a multi-year high above $2/lb.

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Forex

Speculators increased bullish dollar bets in response to the early August strong jobs report and hawkish Clarida comments. The reporting week ended last Tuesday when several currencies was under pressure from a strong greenback, not least the euro which was challenging key support at €1.17. In response to these developments, the net dollar long against ten IMM currency futures and the Dollar index jumped one-third to a fresh 17-month peak at $4.8 billion.

Selling was broad but mostly concentrated in euros, Japanese yen and Aussie dollar while short covering helped flip the Sterling position back to a net long.

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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.

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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

Commodity Weekly: Weather Woes Keep Agriculture Commodities on Top

The commodity sector, with the exception of some key food items, remains on the defensive as the current surge in virus cases in major economies clouds the short-term outlook for growth and demand. In addition, the prospect for an earlier-than-expected return to a tightening regime by the US Federal Reserve has helped put upward pressure on bond yields and the dollar, thereby reducing the appeal for investment metals, such as gold and silver.

The macro-economic outlook remains clouded by the current third Covid-19 wave which continues to spread across Asia and parts of the US, thereby creating a great deal of uncertainty with regard to the short-term demand for key growth and demand-dependent commodities from crude oil and gasoline to copper and iron ore. With this in mind, the increased possibility of the US tapering its massive asset purchase program is unlikely to be followed by others, potentially leading to rising US Treasury yields and a stronger dollar.

As in the previous week, pockets of strength remained with several key agriculture commodities continuing to find support following what up until now has been a very volatile weather season across some of the key growing regions of the world. Cold weather in parts of Brazil has hit the sugar cane crop while also causing extensive damage to the region’s coffee as well. Elsewhere, extreme heat leading to dryness have sliced the expectations for this year’s grains crop, especially corn and wheat.

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In its latest World Supply and Demand Outlook (WASDE) the US Department of Agriculture forecast the lowest US wheat harvest in 19 years with global supplies suffering a further downgrade in response to large reductions to estimates from drought-hit fields in Canada and Russia. The prospect for lower shipments from Russia, the world’s biggest exporter, saw the high protein milling wheat future traded in Paris jump to a three-month high above 255 per tons, some 35% above the five-year average.

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Gas prices in Europe rose to another record before retreating with supply concerns being somewhat offset by weaker sentiment in the broader energy market given the latest wave of Covid-19. In the US, gas prices headed for their biggest weekly loss following a bigger-than-expected weekly rise in stocks, but forecast for another incoming heatwave will likely limit the correction with tight winter supplies, just as in Europe, a risk that may continue to support prices ahead of winter.

In Europe, an unexplained reduction in flows from Russia combined with rising competition from Asia for LNG shipments has made it harder to refill already-depleted storage sites ahead of the coming winter. These developments have led to rising demand for coal, thereby forcing industrial users and utilities to buy more pollution permits, the price of which are already trading at record prices. All in all, these developments have led to surging electricity prices which eventually will be forced upon consumers, thereby adding to the already rising cost of everything.

Gold spent most of the week trying to recover from the price collapse that followed the stronger-than-expected US jobs report on August 6. The sell-off culminated during the early hours of the Asian session last Monday when the yellow metal, within a short period, tanked more than 70 dollars. Coming into August, sentiment was already hurt by gold’s inability to rally in response to the July slump in Treasury yields. A drop in yields that concluded just days before the slump when US 10-year inflation-adjusted yields hit a record low at -1.22%.

Having struggled to rally amid favorable yields, gold immediately turned lower at the first sign of higher yields and once key technical levels in the $1750 to $1765 area were taken out, the flood of sell stops during a very illiquid time of day took it briefly down to the March double bottom below $1680, where fresh bids from physical gold buyers in Asia emerged once again.

The short-term outlook remains challenged by the risk of yields and the dollar both moving higher ahead of the late August meeting of central bankers at Jackson Hole. The annual symposium which in the past has been used to send signals of changing policies or priorities to the market.

A weekly close above $1765 in gold would create a bullish candle on the chart and it may help send a supportive signal to a market still dizzy following the latest rollercoaster ride. However, in order to look for a recovery, silver needs to join in as well and, so far, it is struggling with the XAUXAG ratio trading above 75 ounces of gold to one ounce of silver, its highest level and silver’s weakest against gold since December.

Copper’s recent and price-supportive focus on potential supply disruptions in Chile eased as BHP workers at the Escondida mine, representing 5% of global output, voted to accept a final wage proposal. In recent weeks, the threat of supply disruptions have offset surging Covid-19 cases and worries about a Chinese slowdown hitting demand. With the risk of disruptions fading the market could, just like oil, see a period of sideways trading while the current virus outbreak is being brought under control.

While resistance has been established above $4.4/lb, support has been equally strong below $4.20/lb. Overall, however, we still see further upside with the price of High-Grade copper eventually reaching $5/lb, but perhaps not until 2022 when continued demand for copper towards the green transformation and infrastructure projects increasingly could leave the market undersupplied.

Crude oil remains one of the biggest losers so far this month, only surpassed by iron ore and silver. Following several months where the main focus was on OPEC+ and its ability to support prices by keeping the market relatively tight, the focus has once again reverted to an uncertain demand outlook caused by the rapid spreading of the Delta coronavirus variant, particularly in key importer China. A development that has led to growth downgrades and raise questions about the short-term demand outlook for oil and fuel products from the world’s biggest buyer.

While some of the major bulls on Wall Street see the disruption from the Delta variant being transitory and only negatively impacting demand for a couple of months, both the IEA and OPEC in their latest monthly oil market reports cut their demand outlook for the remainder of the year. The latest wave is leading to a renewed reduction in mobility around the world with the biggest concern being the flare-up in China, where a still-low number of infected has been met by an aggressive approach to contain the outbreak.

However, the flexibility exhibited by the OPEC+ group during the past year will likely prevent a deeper correction should demand growth suffer a bigger-than-expected headwind from the current outbreak. With this in mind and considering the lack of response from US producers despite high prices, we maintain a constructive view on the direction of prices into yearend.

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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

Delta Drives Cut in Oil and Copper Longs; Gold Steady Before The Storm

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 and financials up until last Tuesday, August 3. A relative calm week that saw stocks reach new highs with many companies beating earnings expectations, the yield on 10-year Treasuries reaching a new cycle low while the dollar softened.

All developments that occurred before explosive end of week developments, starting with Wednesday’s hawkish comments from Clarida, the Fed vice-chair, and topped up with Friday’s strong US jobs report. Commodities traded lower led by crude oil and copper in response to the rapid spreading of the delta coronavirus variant and its potential negative growth and demand impact, especially in Asia.

Commodities

The Bloomberg Spot index lost 0.5% during the reporting week to August 3, as the rapid spreading of the delta coronavirus variant in Asia and parts of the US raised concerns about demand for key commodities such as crude oil and copper. These developments were somewhat offset by gains in precious metals as both the dollar and yields softened before the sharp reversal on Friday. The grains market saw a strong adverse weather-related jump in wheat prices.

Overall, these developments resulted in no major change in the overall commodity exposure held by funds with selling of crude oil, soybeans, natural gas and copper being offset by buying in wheat, corn, sugar and silver.

Energy

Crude oil’s late July rally ran out steam after the market attention increasingly turned from OPEC+ to Asia, and especially China, where the delta coronavirus variant continued to spread thereby putting a cloud over the short-term demand outlook. As a result, the net long in WTI and Brent was cut by a combined 18.4k lots to 614k lots, thereby reversing one-third of what was added in the previous week. The bulk of the change led by long liquidation with no signs of increased short-selling activity.

The natural gas long in four Henry Hub deliverable swap and futures contracts was, despite surging prices, cut by 4% to 312k lots. This the fourth consecutive week of net selling has occurred while the price has continued to rally, and it closed the week at $4.14, the highest since December 2018 in response to hot weather and robust export of LNG raising concerns about insufficient stockpiles for the coming winter.

Following the worst week for crude oil in ten months, the market will be watching closely the monthly oil market reports from EIA on Tuesday followed by the IEA and OPEC on Thursday for any signs of changes in the demand outlook. The rapid spreading of the delta coronavirus variant in Asia and parts of the US has seen the market focus switch back to demand worries from OPEC’s ability to keep prices supported by keeping supplies sufficiently tight.

Metals

The gold long, just like the price, held steady with a small net addition of just 851 lots disguising a pickup in short selling interest with traders increasingly seeing the risk of a downside move in response to gold’s week-long failure to respond to a sharp fall in US Treasury yields. A worry that was confirmed on Friday, when the a very strong US jobs report helped push an already weakened price over the edge to record its biggest fall in seven weeks.

Silver meanwhile saw the net long receiving a 22% boost but with the sole driver being short covering. Copper was net sold with virus worries off-setting the risk of a strike related supply disruption in Chile, the world’s number one producer.

With the market focus on jobs over for now, the short-term direction of precious metals could be dictated by U.S. inflation – the other part of the Fed’s mandate – with July CPI due on Wednesday.

Today’s flash crash

Gold (XAUUSD) and silver (XAGUSD) already under pressure following Friday’s stronger than expected US jobs report, suffered a flash crash during the early parts of the Asian session. Following the weak close on Friday both metals had been left vulnerable into the opening, and with both Singapore and Japan on holiday the Asian opening offered even less liquidity than normal. Within minutes gold dropped more than 4% while silver slumped 7%, before pairing losses ahead of the European opening.

Traders have been rattled by golds strange behavior in recent weeks when falling yields failed to boost the price, while last week’s small turnaround in yields triggered an immediate and strong negative response. This sort of capitulation can often coincide with a significant low in the market but for that to happen economic data is required to turn more gold friendly.

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Agriculture

Selling of soybeans were more than offset by strong buying of corn and both wheat contracts on KCB and CBOT. CBOT wheat futures traded close to the May high with adverse weather developments increasingly pointing to tighter global supplies due to expectations of lower output from top exporters Russia and the US. Rains have hurt grain quality in parts of Europe and China, while heat and drought have slashed the production outlook in Russia and North America. Apart from ongoing weather developments the market will also be watching a monthly supply and demand report from the US Department of Agriculture on Thursday.

Forex

A mild bout of dollar weakness in the week to last Tuesday, saw speculators reduce bullish dollar bets from a 17-month high by 18% to $3.6 billion. This before Clarida the Fed vice-chair’s hawkish comment on Wednesday and Friday’s across the board strong jobs report saw the 10-year Treasury yield climb to 1.3% and the dollar strengthen against it major peers, not least the Euro which ended the week at a four-month low.

The mentioned change was primarily driven by GBP and JPY buying. The sterling position returned to neutral while the yen short was reduced to a six-week low. Overall, and just like the previous week, the overriding theme was the reduction in positions, both long and short, as the peak summer holiday period continues to reduce risk appetite.

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.

Start trading now

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

Virus and Yield Rise Clouding Short-Term Commodity Outlook

The commodity sector began August on the defensive on a combination of weakness in Chinese economic data and the rapid spreading delta coronavirus variant causing renewed worries about the short-term demand outlook. Growth-dependent commodities such as crude oil and industrial metals traded lower while precious metals, having struggled to rally in response to the July slump in US Treasury yields, traded lower as yields and the dollar rose following hawkish Fed comments and a very strong US job report.

Pockets of strength remained with agriculture commodities such as sugar and wheat receiving a boost from what so far has been a very volatile weather season across some of the key growing regions of the world. Gas prices trading at a 2 ½-year high in the US and at record levels in Europe was another area that continued to exhibit strength amid tight supply at a time of strong demand, both raising concerns that stockpiles may not build sufficiently ahead of the peak winter demand period.

Despite another Covid-19 related cloud, the macro-economic outlook remains supportive with strong growth in Europe and the US somewhat off-setting concerns in Asia where the virus has penetrated fortress China resulting in renewed lockdowns and down revisions to growth.

The copper market, while rangebound, has during the past couple of months gone from being very bullish to more cautious. A whole host of opposing forces have in recent weeks been pulling the price in opposite directions, thereby causing some uncertainty as to the short-term direction. Overall, however, we still see further upside with the price of High-Grade copper eventually reaching $5/lb, but perhaps not until 2022 when continued demand for copper towards green transformation and infrastructure projects increasingly could leave the market undersupplied. Despite the risk of a slowdown in China, demand growth elsewhere will highlight the risk of rising demand not being met – at least in the medium term – by rising supply which tends to be quite inelastic.

Currently, supporting the price of copper is the risk of simultaneous strike disruptions at three major mines in Chile, including Escondida, the biggest mine. However, against that we see uncertainty related to signs of a slowdown in China and the general growth impact of the current spreading of the Delta coronavirus variant. Demand for refined copper has also received a small setback after Chinese policymakers reversed a planned ban to scrap metal imports, and finally Fed vice-chair Clarida’s hawkish comments earlier this week about normalization could further dampen investor appetite for metals as a diversifier and inflation hedge.

CBOT wheat futures traded close to the May high before suffering a small bout of profit taking. Adverse weather developments increasingly point to tighter global supplies due to expectations of lower output from top exporters Russia and the US. Rains have hurt grain quality in parts of Europe and China, while heat and drought have slashed the production outlook in Russia and North America. According to the latest COT report, speculators have only just flipped their position in wheat back to a net long, and further positive price momentum, supported by bullish fundamentals, may force them to chase the market higher.

However, in the short term, mounting cases of the Delta coronavirus variant may raise doubts over the level of demand while some major consuming nations such as Egypt, Pakistan and Turkey have backed off from purchases in recent weeks. Under pressure from rising prices, the Egyptian President is even considering raising the price of the country’s subsidized bread. Something that was last attempted in 1977 when then President Anwar Sadat reversed a price rise in the face of riots.

Natural gas prices across the world remain bid on a combination of hot weather driving increased demand for cooling and rising demand from industry as the global economy bounces back from the pandemic. In the US, the price of Henry Hub is trading above $4/MMBtu, the highest price for this time of year in at least ten years on a combination of rising domestic demand and rising LNG exports. This comes at a time when production has struggled to pick up, especially due to the slow recovery in shale oil production, from which gas is a byproduct.

Much worse is the situation Europe where prices have reached record levels. An unexplained reduction in flows from Russia, combined with rising competition from Asia for LNG shipments, has made it harder to refill already-depleted storage sites ahead of the coming winter. These developments have led to rising demand for coal, thereby forcing industrial users and utilities to buy more pollution permits, the price of which are already trading at record prices.

All in all, these developments have led to surging electricity prices which eventually will be forced upon consumers across the continent, thereby causing a major headache for governments and potentially challenging the political will to decarbonize the economy at the agreed rapid pace.

Crude oil traded lower and following several months where the main focus was on OPEC+ and its ability to support prices by keeping the market relatively tight, the focus once again reverted to an uncertain demand outlook caused by the rapid spreading of the Delta coronavirus variant, particularly in key importer China. A development that has led to growth downgrades and raise questions about the short-term demand outlook for oil and fuel products from the world’s biggest buyer.

The latest developments justify the continued cautious approach by OPEC+ towards raising production too fast, too soon. It also highlights why Saudi Arabia and other leading members of the group has been keen on prolonging the current quota system beyond next April.

The flexibility exhibited by the OPEC+ group during the past year will likely prevent a deeper correction should demand growth suffer a bigger-than-expected headwind from the current outbreak. With this in mind and considering the lack of response from US producers despite high prices, we maintain constructive view on the direction of prices.

Precious metals

Having just returned from my holiday, the first question I had to ask was why gold was not trading quite a bit higher? During the past month, US Treasury yields have seen steep declines and with inflation expectations not changing much, the inflation-adjusted rate, or real yield, slumped to a record low at -1.22%. Given the historical strong inverse correlation between real yields and gold, the failure this past month to rally has caused a great deal of head scratching among participants, potentially resulting in some long liquidation for fear that a recovery in yields may not be met by the same level of inaction.

A worry that was confirmed on Wednesday when the first signs of recovering yields emerged in response to hawkish comments from Fed vice-chair Clarida discussing the interest tightening path. The comments which helped send the dollar and yields higher was given additional credibility following a very strong US job report for July.

Silver meanwhile has witnessed an even greater exodus with its relative value against gold falling to a six-month low after the gold-silver ratio traded back above 72 ounces of silver to one ounce of gold. Responding to this disappointing performance, hedge funds recently cut their net long to just 21k lots, a 14-month low. Silver will need to see the ratio break back below 70 in order to return to the driving seat, but for that to happen gold would first need to weather the potential short-term challenge triggered by recovering yields.

With gold and silver drifting lower, the hardest hit of the semi-industrial metals is platinum which has seen its discount to gold widen to 800 dollars from an April low at 300. Reasons being the current chip shortage which has curbed auto production, rising sales of EV’s and the current spreading of the delta variant.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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

Longs in Oil and Grains Trimmed Ahead of Key Risk Events

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 and financials up until last Tuesday, June 29. A week where risk-on courtesy of stable Treasury yields and an unchanged dollar helped drive the VIX index to a 16-month low and U.S. stocks, especially the Nasdaq to fresh record highs. Commodities generally traded higher with the Bloomberg Commodity Index rising 1.8% thereby supporting speculative net buying in 14 out of the 24 futures contracts tracked in this report.

Commodities

The commodity sector returned to form with broad gains seen across most sectors, thereby leaving the Bloomberg Commodity Index up by 1.8% on the week. The most noticeable exceptions being precious metals where gold-selling continued, grains where positions were adjusted lower ahead of important acreage and stock reports last Wednesday, and also crude oil where some profit-taking emerged ahead of the OPEC+ meeting. The 3% increase in the total net long to 2.3 million lots or $134.6 billion nominal value was led by natural gas (+61.4k lots), RBOB Gasoline (7.3k), wheat (7.8k), cotton (9.3), and HG Copper (8.3k). The biggest reductions were seen in WTI crude oil (-14.2k) and the soybean complex.

Energy

Despite a continued rally in crude oil during the reporting week, speculators opted to make a small reduction ahead of last week’s OPEC+ meeting. Selling was most pronounced in WTI with the bulk of the overall 3% reduction to 408k lots being long liquidation with no signs of short sellers emerging.

Latest

Crude oil trades close to unchanged with market participants trying to decipher what happens next within the OPEC+ group following a rare diplomatic spat between the UAE and Saudi Arabia. The UAE is looking for better terms and have so far refused the join a deal that would increase production by 400k bpd per month from August to December. At stake if the unity weakens, is the group’s ability to continue to control prices, and with this in mind the market is still refusing to believe that a deal will not be struck eventually. The OPEC+ meeting look set to resume Monday afternoon Vienna time. Twitter users can follow developments on Twitter by using #OOTT and #OPEC.

Metals

Speculators cut bullish gold bets by 5% to an eight-week low in the week to June 29, mostly due to fresh short selling. It highlights the prospect for a potential short-covering rally on a break above $1814. Silver and platinum both got bought with buyers also returning to copper for the first time in two months to lift the net long by 43% to 27.6k lots.

Latest

Gold trades near a two-week high, and resistance at $1795 as concerns over an earlier-than expected rate hike by the Federal Reserve eased following a mixed bag of U.S. job data on Friday. However, with U.S. ten-year real yields reaching low levels last seen prior to the mid-June FOMC meeting, the recovery so far looks anything but impressive. Focus this week on FOMC minutes and the dollar which currently provides most of the directional input. Speculators meanwhile cut bullish gold bets by 5% to an eight-week low in the week to June 29, mostly due to fresh short selling. It highlights the prospect for a renewed short-covering rally on a break above $1814.

Agriculture

Ahead of key acreage and stock reports from the USDA last week, the grain market saw a small net reduction in bullish bets primarily driven by a reduction in all three soybean contracts on rising short selling. Speculators meanwhile, and rightfully so, maintained their belief in higher corn prices by increasing the net long by 1% to 245k lots. Wheat was mixed with the selling of CBOT returning the net position to neutral while the net long in Kansas wheat received a 53% boost to 22.7k lots on emerging drought worries.

Forex

In forex, broad dollar buying continued albeit at a slower pace than the previous week when the market reacted to the mid-June hawkish FOMC meeting. Speculators cut their greenback short against ten IMM currency futures and the Dollar index to a nine-week low at $11 billion. Dollar buying was most noticeable against the JPY which despite trading close to unchanged on the week saw bearish bets jump 30% or 16k lots to a two-year high at $7.9 billion equivalent. Long liquidation was seen in EUR (-1.9k), CHF (-2.5k) while small buying was seen in CAD (+2.6k) and MXN (+9k)

Financials

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.

Start trading now

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

Grains in The Crosshairs on Tight Supply Concerns

U.S. traded grain futures staged a comeback yesterday after two reports from the US Department of Agriculture raised the prospect for even tighter global supplies following the Northern Hemisphere harvest this autumn. The quarterly stock and annual acreage reports both came in lower than expected, and considering the U.S. is the world’s largest corn and second-largest soybean producer, it highlights the risk to supplies at a time where weather developments remain quite volatile.

The combination of lower planted acreage reducing the ability to replenish stocks now at the lowest since at least 2015, will result in the market becoming even more weather obsessed as changes up or down could still swing final production numbers by millions of bushels. Currently in the U.S. wet weather has hit parts of the U.S. farm belt, while drought risks are rising in northwestern areas and across Canada.

Why haven’t U.S. farmers responded to surging prices in recent months and gone all in to extract as much profit as possible following years of price disappointments? Perhaps the answer lies exactly in that, with farmers appearing to have become more disciplined following a number of years with low prices and excess supply. In addition, the general commodity rally has also increased the cost of fertilizers and gasoline, thereby potentially deterring farmers from expanding sowings to far into marginal and less yielding areas.

The Bloomberg Grains Spot index jumped 6.4% with individual prices of wheat, soybeans, and corn all rallying. Not least corn which after closing limit at $5.885 per bushel, a 6.3% increase on the day, has continued higher today.

Source: Saxo Group

Loss of positive price momentum since May helped accelerate an ongoing reduction in bullish grain and soybean bets held by speculators. Since the first week of January when the combined net-long hit a record 800k lots, it has been reduced by close to 50%. The bulk of the reduction being led by the soybean complex in response to slowing demand from China and President Biden considering to give refiners relief from U.S. biofuel laws, which require them to blend billions of gallons of ethanol and other biofuels into their fuel or buy credits, known as RIN’s, from those that do. The cost of RIN’s has reached a 13-year high, thereby putting some refineries at risk of bankruptcy.

Overall, however, the much-reduced involvement from speculators may add some tailwind to the price as strong fundamentals may drive an improved technical outlook, which is what many leveraged funds focus on the most when making decisions to buy or sell.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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

Hawkish FOMC Hurts Gold Longs and USD Shorts

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 and financials up until last Tuesday, June 22. A week that dealt with the aftermath of the hawkish FOMC meeting on June 16. While most asset classes initially sold off, some including bonds and stocks had recovered strongly by the end of the reporting week last Tuesday. The stronger dollar meanwhile triggered a 31% reduction in the speculative dollar short while losses in metals and grains drove down the Bloomberg Commodity index by 2.2%, thereby triggering the biggest one-week reduction in bullish bets in four weeks.

Commodities

The commodity sector led by metals and grains took a tumble following the June 16 FOMC after the hawkish signal helped send the dollar higher and the inflation expectations lower. The total net long across 24 major commodity futures tracked in this was reduced by 6% to 2.24 million lots, a four week low. Biggest reductions seen in gold, silver and platinum as well as soybeans and sugar, while crude oil longs were left untouched amid strong fundamental tailwinds.

Energy

Crude oil, products and natural gas all traded higher during the reporting week, thereby avoiding the post-FOMC weakness that was seen across metals and agriculture. Strong fundamentals driven by OPEC+ keeping supplies tight as global demand recovers helped cushion crude oil with speculators only cutting their net long positions by 1% in both WTI and Brent.

Latest

Crude oil trades steady near the highest since 2018 with market participants expecting OPEC+ will keep supplies tight enough to support current levels. The group meets on Thursday to decide production levels from August and beyond, and the market is currently looking for an increase of 500,000 barrels per day which is less than the increases seen during the past three months.

With virus uncertainties due to the highly contagious delta strain and questions about an Iran nuclear deal hanging over the market, the group may opt for caution, hence the current price strength. Brent support at $74.5 while it would need to break below $72 before signaling risk of a deeper correction.

Metals

Speculators made deep cuts to their gold, silver and platinum longs after the FOMC meeting helped boost the dollar while lowering inflation expectations. The accelerated selling that followed the meeting helped drive down gold longs by 33% to 76k lots, a seven-week low and silver by 36% to 29k lots while the 81% reduction in platinum longs returned the position to neutral. Focusing on the latter, the relative strength seen in platinum since the initial sell-off can to a certain extent be explained by speculators rebuilding their long positions.

Latest

Gold continues to consolidate below $1800 with a break above $1820 probably needed to attract short-covering and fresh buying interest, especially after many speculators threw in the towel following the hawkish FOMC meeting on June 16. Before then the market remains focused on the dollar and its recent price adverse strength and whether inflation is indeed transitory, as signaled by central banks, or becoming more entrenched.

Agriculture

Speculators cut bullish grain and soybean bets to a nine-month low with the biggest reductions seen in soybean and bean oil. Bucking the trend we saw the wheat position flipping back to a small net long.

Forex

In forex, the broad dollar buying that followed the hawkish FOMC meeting on June 16 helped trigger a 31% reduction in speculative dollar short against ten IMM currency futures and the Dollar Index. The biggest flows that triggered the $6 billion reduction to a seven-week low at $13.1 billion was primarily driven by sales of euro (-29k lots), sterling (14k) and yen (7k). Despite falling by 2.2% the Swiss franc was bought to the tune of 4k lots.

Financials

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.

Start trading now

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

Crude Oil Remains Bid With Focus on OPEC+ and Eia Stock Report

Crude oil continues higher with WTI and Brent both reaching levels last seen in 2018. This during a period where rallies across other commodities, especially in metals and key crops have run into corrections. While the energy sector remain supported by an ongoing recovery in global fuel demand and tightening supply, controlled by OPEC+, other sectors have been hurt by a stronger dollar, improved crop weather and Chinese efforts to curb metal prices.

These developments have during the past few weeks triggered a rotation by speculators out of metals and agriculture into energy. The combined net long in oil and fuel products (ex. natural gas) reached 977k lots in the week to June 15, the biggest bet on rising energy prices since October 2018, but still 33% below the January 2018 record. While industrial metals have suffered what looks like a short-term setback on rising market intervention by Chinese authorities and reduced focus on reflation, the energy sector has increasingly become the go to commodities.

This in the belief that OPEC+ in the near-term will manage production increases in a manner that ensures continued price support as global demand continues to recover, and later on due to increased concerns that lack of CAPEX spent on new production could leave the market undersupplied from late 2022 and onwards.

The combined net long Brent and WTI crude oil reached 737k lots, again a level of exposure that was last exceeded in October 2018. A tightening spread to Brent and speculation that storage levels at Cushing, the WTI futures delivery hub, could shrink further amid strong Midwest refinery demand helped drive a 35% reduction in the gross short, thereby supporting a spike in the long/short ratio to a three-year high at 22.8 longs per one short position. While highlighting the risk a market at risk of becoming one-sided it also shows the strong belief in higher prices currently being exhibited by investors.

In our daily podcast, which you can find by searching for “Saxo Market Call” on any of your favorite podcast channels, we discussed the reasons why WTI crude oil has led the recent rally. Once again just like during the market panic last April, the focus has returned to Cushing, the massive storage hub where WTI futures contracts are exchanged for physical oil.

On April 20 last year WTI crude oil temporarily hit minus 40 dollars per barrel as a Covid-related collapse in demand almost led to storage tanks topping out. Fast forward to today and we find US oil production still lingering some 2 million barrels per day below the pre-pandemic peak as the sector struggles to find a gear amid a change in the focus.

Strong Midwest refinery demand as fuel demand continues to recover and the mentioned slow recovery in US shale production has left Cushing stocks trailing their five-year average.

Later today at 14:30 GMT the EIA will publish its “Weekly Petroleum Status Report” and following last nights update from the American Petroleum institute, the market is looking for a fifth consecutive draw in crude stocks with 2.6 million being at Cushing. Result can be found on my Twitter @ole_s_hansen.

Increasingly, however, the oil market focus will turn to next week’s OPEC+ meeting, and through the actions or inactions of the group the market will be sent a clear signal whether its price stability through raising production or higher prices that the group will be seeking. Once again we may find Russia and Saudi Arabia on each side of the argument, but as per usual and as we grown accustomed to in recent months, the group will undoubtedly find a compromise that suits both sides.

WTI comment from our technical analyst Kim Cramer

In the short-term WTI crude oil continues to trade within a rising channel, and the uptrend will stay intact as long the price stays $69.75.

On a slightly longer-term chart we can see WTI is nearing strong resistance towards $77, the 2018 peak. If penetrated it may extend its 5 wave all the way to around $85. RSI seems to building up divergence but the jury is still out as to whether the uptrend has reached a level of exhaustion.

Source: Saxo Group
Source: Saxo Group

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 and Metals Sold, Energy Bought Ahead of FOMC

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 and financials up until last Tuesday, June 15. A week that covered the period up until last week’s FOMC meeting and the hawkish surprise it delivered. Apart from a weaker dollar which attracted additional short selling, some of the other markets, most noticeable commodities had already started to see rising risk adversity, while bond yields crept lower before starting a rollercoaster ride which eventually today has led it back to unchanged pre-FOMC levels. The Bloomberg commodity index traded softer by 2.2% as the rotation out of agriculture and metals into energy continued.

Commodities

The commodity sector saw a small amount of net selling ahead of last week’s FOMC meeting, but behind the 1% reduction to 2.4 million lots we found a week where speculators continued to rotate out of agriculture and metals, both industrial and precious, and into energy, especially crude oil. Chinese efforts to curb industrial metal prices, lower gold prices on reduced inflation expectations as the market “buy” into the transitory message from central banks, and improved weather and growing conditions in the U.S. have all led to long liquidation and reduced appetite for exposure in these sectors.

Energy

The combined net long in oil and fuel products (ex. natural gas) reached 977k lots, the biggest bet on rising energy prices since October 2018. While industrial metals have suffered what looks like a short-term setback on rising market intervention by Chinese authorities and reduced focus on reflation, the energy sector has increasingly become the go to commodities. This in the belief that OPEC+ in the near-term will maintain market tightness as global demand continues to recover, and later on due to increased concerns that lack of CAPEX spent on new production could leave the market undersupplied from late 2022 and onwards.

The combined net long Brent and WTI crude oil reached 737k lots, again a level of exposure that was last exceeded in October 2018. A tightening spread to Brent and speculation that storage levels at Cushing, the WTI futures delivery hub, could shrink further amid strong Midwest refinery demand helped drive a 35% reduction in the gross short, thereby supporting a spike in the long/short ratio to a three-year high at 22.8 longs per one short position. While highlighting the risk a market at risk of becoming one-sided it also shows the strong belief in higher prices currently being exhibited by investors.

Metals

Bullish gold bets were scaled back for a second week with profit taking and fresh short selling emerging ahead of the FOMC meeting and following the recent rejection above $1900. The 10% reduction reduced the net long to 114k lots, a four week low. Silver saw a small amount of buying while copper longs were cut to just 20k lots, a one-year low and some 71k lots below the peak from last October. Once the weak technical outlook, supported by an expected improvement in the fundamental outlook, starts turning the price may see a strong bounce from buyers returning.

Agriculture

The grain and soybean sector continued to deflate with speculators cutting the combined net long in corn, wheat and soybeans by 15% to 352k lots, the lowest since last October. While the wheat net-short extended to 8.4k lots it was corn and not least soybeans that saw most of the selling. This on a combination of improved weather raising production expectations and potentially a reduction in demand for biofuels to be blended with gasoline.

Forex

In forex, the flows across ten IMM currency futures and the Dollar Index were very mixed but overall they resulted in continued dollar selling with the net short reaching a three-month high at $19.3 billion.

However, as can be seen from the table below, speculators were in general risk-off mode across the major pairs with both long and short positions being reduced. This just the day before the FOMC sprung a hawkish surprise which helped send the Greenback sharply higher to record its fourth straight week of gains, thereby challenging the short dollar consensus trade.

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.

Start trading now

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

Crude Oil Hits Cycle High on Rising Investment and Physical Demand

What is our trading focus?

OILUKAUG21 – Brent Crude Oil (August)
OILUSJUL21 – WTI Crude Oil (July)


Commodities of most colors continue higher on a combination of expectations for a post-pandemic growth sprint triggering supply bottlenecks, green transformation focus, weather worries, and increased investment demand from speculators and investors enjoying the current momentum while seeking a hedge against the risk of accelerating inflation

The year-on-year rate of change has reached levels not seen for the past couple of decades, and with rising input cost forcing more and more companies to pass on the cost to consumers, we are increasingly seeing the risk of the current inflation spike not being the transitory phenomenon being touted by major central banks. Once inflationary pressures take hold it becomes very difficult to reverse and the risk being a self-feeding loop that may end up driving commodity prices even higher over the coming months and quarters, hence the increased focus on a new super-cycle.

While rising physical demand has been seen as the main reason behind the continued run up in commodity prices, investment demand plays an equally important role. What they all have in common is that a vast majority of investment flows from asset managers and hedge funds into commodity investments will eventually find their way to the futures market. These investments flows which often are initiated for reasons that have nothing to do with individual commodity fundamentals is therefore adding an additional layer of support.

Examples of motives why asset managers decides on a broad commodity investment, apart from the fear of missing out (FOMO) can be momentum and hedging against rising inflation and a weaker dollar, both triggering reallocations from other asset classes.

Three of the best-known commodity indices that in some form are tracked by billions of dollars are the Bloomberg Commodity index, the S&P GSCI, as well as the DBIQ Optimum, yield diversified commodity index. Exchange-traded fund providers such as Invesco, iShares, iPath, and WisdomTree offer different varieties of these commodity indices. Some aim to track the index with no discretion while others look to optimize the return by finding the most opportunistic location on the futures curve to invest.

This broad-based commodity ETFs continue to see strong demand, and a Bloomberg article highlights the recent surge in fund flows into the iShares GSCI Commodity Dynamic Roll Strategy ETF (Saxo ticker: COMT:xnas). During the past couple of weeks the ETF has seen assets more than double to the current $2.3 billion. Looking at the overall ETF market for broad-based exposure the article reports that $7.3 billion of allocations so far this year has taking assets to $17 billion overall.

As mentioned, providers of these ETFs will typically hedge their exposure in the futures market, thereby giving these markets an underlying bid as long demand continues to grow. As per the table above and using the mentioned COMT:xnas as an example we see that for each dollar invested around 55 cents goes into energy. Digging a bit deeper we find almost 40% being invested in WTI and Brent. Such flows help to explain why crude oil – obviously supported by OPEC+ keeping supplies tight – continues to be bid with very shallow corrections seen during the past few months.

The tightening market conditions that has emerged during the past six months is another reason why asset managers once again, and for the first time in a number of years, view commodities as an interesting investment case. With several commodities seeing tightening conditions their forward curves have moved in backwardation, meaning the front-month contract trades at a premium to the deferred.

The higher the spread, the higher the yield that can be harvested when rolling futures contracts out the curve. The chart below shows the average 12-month roll yield of 26 major commodity futures, and it shows how we just recently moved out of contango which for the past six years meant investors were left with a monthly cost of holding a position due to the negative roll yield.

We highlighted the energy sector as being the main benefactor of investment flows into ETFs and it probably helps to explain why crude oil has stayed bid without much in terms of major correction for several months now. Crude oil trades higher with WTI settling above $70 yesterday for the first time since October 2018 while Brent has broken a barrier of resistance at $72. Supported by robust demand in China, US and Europe and easing virus impact elsewhere, especially in India.

In addition, the API last night reported a 2.1 million barrel drop in US crude stockpiles, and if confirmed by the EIA today it will be the third weekly decline. With EIA’s Short-term Energy Outlook, published yesterday, only seeing moderate growth in US shale production, OPEC+ can increasingly control the price, given they are sitting on nearly 6 million barrels of spare capacity which they can release at will.

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

Subdued Fund Buying Despite Strong Commodity Gains

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 and financials up until last Tuesday, June 1. A week that saw S&P 500 trade mostly sideways near its record high while the technology sector lost steam. Treasury yields rose ahead of jobs data with the market pondering for how long the Fed can continue adding support amid rising inflation. The dollar held steady while the commodity sector recovered strongly from the May correction.

Commodities

The commodity sector saw buyers return following the May correction with the Bloomberg Commodity index rising 3%. All sectors apart from precious metals and livestock recorded strong gains led by crude oil, copper, corn and coffee. In response to these developments hedge funds and large money managers increased bullish bets across 24 major commodity futures by 3% to 2,358k lots.

Given the strength of the recovery a relatively small increase that was led by crude oil (25k), gas oil (17k), natural gas (+11.7k), corn (21.9k) and sugar (12.5). Other contracts such as copper (-6.3k) and both wheat contracts (-5.7k) were sold despite recording strong price gains. Potentially a sign that investors despite being dictated by the price action to be long are feeling somewhat uncomfortable with prices at multi-year highs and breakeven yields (inflation) that has been drifting lower during the past three weeks.

Energy

Most of last week’s commodity buying was concentrated in the energy sector, most noticeable crude oil and gas oil. OPEC’s bullish demand outlook for the second half combined with the OPEC+ groups ability to control the price, helped drive Brent above $70 while WTI reached levels last seen in 2018. In response to these developments hedge funds increased their combined crude oil net long by 25.2k lots to 649.5k, a three week high but still some 88k below the recent peak in February.

While the overall increase in both WTI and Brent was primarily driven by fresh buying, the bulk of the buying occurred in WTI. This in response to tightening US market amid increased demand for fuel and low stocks at a time where production is expected to show a much slower growth trajectory than the one we witnessed during previous cycles of rising prices.

Agriculture

Despite recovering strongly from the late May correction, only small changes were seen in soybeans and wheat. Corn received most of the attention with the 11% price spike driving a 21.8k lots increase, mostly due to short covering with potential buyers showing a degree of hesitancy as we move into the US growing season. In soft commodities, buying benefitted sugar, cocoa and coffee, and just like corn the net buying in coffee was primarily due to the short covering with buyers hesitating chasing the 7% rally seen during the week.

Metals

Gold buying ran out of steam with long accumulation slowing to just 2.9k lots, a far cry from the 61.3k lots that was net bought the previous three weeks. Having surged higher by 240 dollar since early April on a combination of technical buying and short-covering from large trend following funds, the lack of fresh buying last week could indicate that this initial demand has now been met. Also worth noting the reporting week up until last Tuesday did not take into account the US economic data related price swings that hit the market towards the end of last week. At 129k lots, the gold long remains well below the most recent 284k lots peak from March last year.

Elsewhere in the metal space, silver longs were reduced for a second week while copper selling extended to a fourth week. During this time the net long has slumped by 58% to just 27.6k, the lowest bet on rising copper prices since last June when the rally had only just started to gather momentum.

Latest: Gold trades softer in early trading following an end of week rollercoaster ride where prices first slumped on emerging profit-taking, only to bounce back on Friday following what looked like “Goldilocks” US payroll date. Gold’s so far shallow correction following the strong rally since early April potentially highlighting the risk that all is not done yet on that front. The first key downside support level that will determine the underlying strength of the market is the 200-day moving average at $1842. Focus on the dollar and whether yields can maintain their Friday drop, President Biden’s spending plan and the market reaction to the G7 tax proposal.

Forex

In forex, the flows in the week to June 1 were mixed while the overall sentiment was still skewed towards additional dollar selling. The net short against ten IMM futures and the Dollar Index reached a 12-week high at $17.7 billion after speculators net sold $900 million. Despite trading softer on the week, speculators continued to buy euros (5.3k lots) with buying also seen in JPY (3k), CAD (3.9k) and CHF (1.5k), while selling reduced the sterling long by 6.5k lots.

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.

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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 and Grains Led Fund Reduction in Commodities

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, and financials up until last Tuesday, May 25. A week where a steady dollar near a four-month low, and lower bond yields, led by deduced inflation expectations helped send volatility down and stock markets higher. The reporting week also caught the backend of the recent correction in commodities, primarily due weaker industrial metals on Chinese intervention fears and a sharp correction in grains.

Commodities

The Bloomberg Commodity index dropped 1.9% during the reporting week to last Tuesday, with heavy losses in industrial metals (-4.2%) and grains (-5.2%) offsetting continued gains in precious metals and livestock. In response to these developments, hedge funds cut bullish bets across 24 futures contracts by 6% to 2,286k lots, a six-week low. With the exception of gold and WTI crude oil selling was broad with the biggest reductions seen in natural gas, Brent crude oil, HG copper, soybeans and corn.

Energy

Speculators bought WTI crude oil (+18k lots) and sold Brent (-27.5) thereby leaving the combined net down 9.5k lots on the week at 624k lots, the lowest since January. The increase in WTI bets was driven by a rising US fuel demand ahead of the Memorial Day weekend that kicks of the country’s summer driving season, the lowest gasoline stockpiles in almost three decades together with crude stockpiles at Cushing, the WTI delivery hub, some 17% below the five-year average. Brent, the global benchmark, meanwhile saw net selling due to the risk of rising Iranian production together with virus outbreaks in Asia curbing demand.

Latest

Crude oil futures led by WTI (OILUSJUL21) remain supported as the U.S. summer driving season begin, while Brent (OILUKAUG21) continues to struggle breaking above $70 ahead of another round of Iran nuclear negotiations and Tuesday’s OPEC+ meeting where the group is expected to confirm an already agreed 0.8 million barrels per day increase for July. Until the market receives more clarity about the outcome of these, the upside potential beyond the March high at $71.40 seems limited.

Agriculture

The grains sector suffered another week of big price corrections and reductions in bullish bets. Led by soybeans, corn and to a lesser extent wheat, the combined net-long dropped 10% to a seven-month low at 412k lots, with the CBOT wheat position once again returning to almost flat.

Metals

Gold buying extended into a fourth week with the net long rising by 20k lots to a four-month high at 126.9k. It is worth noting that most of last weeks change was driven by a 27% reduction in the gross short position to the lowest since last July. Another sign that long term trend systems, the largest position holders in the trend system universe, continue to scale back short positions, thereby providing a constant bid in the market. Especially after the price broke the downtrend from the August high and after the price recently recovered back above its 200-day moving average.

Bullish HG Copper bets meanwhile slumped 35% to 33.9k lots, the smallest bet on rising prices since last July. The main culprit behind the reduction and copper’s recent 9% correction being China’s attempt to curb commodity prices and hoarding in the domestic market. An attempt both Goldman Sachs and Citigroup expect will fail due to the speed of the rebound in demand in advanced economies, particularly the U.S.

The current gold rally has left both platinum and silver trailing, and during the week both metals saw net selling, most noticeable being the 17% reduction in the platinum net long to a 5-1/2 month low at 14.6k.

Latest

Gold (XAUUSD) is heading for its biggest monthly gain since July as inflation remains the key focus, while Bitcoin at the same time is heading for its worst month since 2011. The recovery in ETF holdings backed by bullion and fund positions in futures remain subdued, a sign that many investors remain unconvinced about the short to medium term direction.

However, Friday’s failed downside attempt could indicate that constant bidding and short covering from long term trend systems are ongoing. Focus this week on Friday’s job report and whether gold can break above $1923, the 61.8% retracement of the August to March correction. Key support at in the $1845-55 area.

Forex

In forex, the flow in the week to May 25 was skewed toward continued dollar selling as the Bloomberg Dollar Index came within a whisker of the January low before seeing a small recovery in the days that followed the reporting period. Following six weeks of continued selling the Greenback short against ten IMM currency futures and the Dollar Index reached a three month high at $16.8 billion. There was some small selling of AUD and CAD but overall buyers had the upper hand, notably in euro (4.1k lots or $0.6bn equivalent), sterling (5.8k or $0.5 billion) and CHF (3.1k or $0.3bn).

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.

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 Long Extends Further; Ag Selling Picking Up Speed

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 and forex up until last Tuesday, May 18. A relatively quiet week ahead of Wednesday’s crypto collapse and FOMC minutes saw stocks, bonds and the dollar trade softer, while the biggest changes were seen across the commodities sector where the month long synchronized rally increasingly showed signs of running out of steam.

Commodities

The Bloomberg Commodity index dropped 0.7% on the week as an emerging correction across agriculture commodities, led by soybeans and corn off-set gains in energy and precious metals. In response to these developments, hedge funds cut bullish commodity bets for a second week with the total net long across 24 futures contracts falling by 4% to a four-week low at 2.4 million lots. Broad selling across all sectors except precious metals was led by corn (25.3k lots), soybeans (25.2k) sugar (20.8k) and crude oil (22.2k) with most of the buying concentrated in gold (11.3k) and natural gas (12.1k).

Commodities Chart

Energy

Speculators cut bullish oil bets for a second week with the combined net long in Brent and WTI falling by 22.2k lots to 634k lots to a six-week low. In Brent, the reduction was driven by increased short selling with the gross short rising to the highest since November. The short-term outlook has once again deteriorated with the prospect for rising Iran production and OPEC+ production increases hitting a market still lacking the synchronized global recovery in in demand. Despite a strong recovery in fuel demand across the U.S. and Europe, continued Covid outbreaks in Asia will continue to impact the short-term outlook and not least the recovery in jet fuel demand, which looks set be very slow with restrictions and lack of interest flying intercontinental not going away anytime soon.

Fuel products continued to be bought with the net longs in gas (143k lots) and NY Harbor ULSD (24.5) both reaching the highest levels in 30 months. Natural gas meanwhile saw fresh buying as the contract made another and so far unsuccessful attempt to gain a foothold above $3.

Metals

Gold’s new found momentum helped drive a third consecutive week of fund buying, which resulted in the net long rising 12% to 107k lots, a 16-week high. Gold has not managed to put together a three week buying spree of this magnitude since last June, and it highlights the continued improvement in the technical outlook during a period of stable Treasury yields, a weaker dollar, and not least heightened volatility across crypto currencies. The improvement in the technical outlook was further confirmed this past week by the move above the 200-day moving average, last at $1845, and the breaching of the downtrend from the $2075 record high last August.

Silver gave back some its recently earned relative strength against gold in response to continued profit taking hitting the up some of the up until recently highflying industrial metals. The net long was cut by 3% to 46.5k lots while a second week of net copper selling reduced the net long there by 15% to 51.9k lots.

Agriculture

Emerging profit taking helped drive a 9% reduction to 963k lots in the net long held in ten major grains and soft commodities. Most noticeable was the accelerated net selling across the three key crops where 25k lots reductions in both corn and soybeans triggered a reduction in the net long to a December low at 458k lots. The bullish soybean momentum has eased with planting in the U.S. progressing at speed while wheat’s two-week decline of more than 11% has been the result of heavy rain in Kansas, the top growing state raising the prospect for record yields. Corn meanwhile managed to hold steady supported by tight supply with focus on Chinese buying, currently running at levels never seen before, and increased demand from the renewable fuel industry.

Agriculture

Forex

Mixed flows in the week to May 18 resulted in an unchanged dollar short position against ten IMM currency futures and the Dollar Index. Buying of EUR (5.9k lots) and CAD (7.5k) being offset by selling of JPY (9.2k) and GBP (3.3k).

Forex Chart

From a ten-year high at $36.8 billion on January 19, the dollar short against the mentioned futures contracts dropped to a $5.2 billion low five weeks ago before short-sellers re-emerged to take it back to the current $15.5 billion.

DXY

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.

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

Commodities Remain the Hot Property of 2021

The “everything rally” in commodities continues to gather steam with the Bloomberg Commodity Spot index rising for the fifth straight week to reach its highest level since 2011. Spurred on by multiple factors from a vaccine-led rebound in global growth, transportation bottlenecks crimping supplies, weather concerns in key growing regions along with rising inflation concerns and a speculative frenzy triggering increased investment demand.

All the major commodities traded higher this past week led by iron ore, Arabica coffee, corn and lumber. Metals of all colors rallied as well with copper reaching a record high while gold, supported by silver, managed to break above $1800. The energy sector came bottom with crude oil, rightfully so, struggling to break higher with virus outbreaks in Asia creating a very uneven demand recovery.

On a macroeconomic level, both the dollar and US Treasury yields provided further support with the Greenback trading softer and nominal yields holding steady. The latter receiving a great deal of attention with rising inflation focus sending 10-year breakeven yields to an eight-year high and real yields back down towards minus 1%.

One of the biggest concerns related to the current surge in global commodity prices is the impact rising food costs have on those populations and economies that can least afford it. The UN FAO’s Global Food Price index, which tracks a basket of 95 food quotations from around the world, surged higher in April to record an annual rise of more than 30%. Food inflation has not risen this fast since 2011 – when higher food prices helped trigger the Arab Spring –  with all sectors rising led by a 100% jump in edible oils, sugar 58% and cereals at 26%.

Grain futures in Chicago remain the key engine behind the continued rally across the agricultural sector. Persistent drought concerns in Brazil and strong demand from animal feed producers have buoyed the corn market while also adding renewed support to sugar and coffee prices. Corn, wheat and soybeans all trade at fresh eight-year highs, while Arabica coffee has reached a four-year high above $1.5/lb

Technical comment on Arabica coffee: After breaking previous resistance at $1.40, the uptrend has accelerated with several indicators supporting the underlying bullish sentiment. To demolish the current positive outlook, a close below $1.3950 is needed in the short term while the longer-term bullish picture remains intact above $1.20. Upside focus now the 2017 high at $1.57.

Source: Saxo Group

Copper reached a record high above $10,300 per tons on the London Metal Exchange and $4.72/lb in New York. Copper is front and centre in the rally that is currently driving raw materials to multiyear or even record highs. Being an integral part of the green transformation process through the rollout of millions of electricity-hungry vehicles over the coming years, copper has surged higher on a combination of both physical but also paper demand from investors looking for inflation hedges in markets with a strong fundamental outlook. An outlook that according the Glencore and Trafigura, two physical commodity titans, could see the need for 50% higher prices in order to provide mining companies the economic incentive to increase the search for additional supply.

Technical comment on High Grade: Copper’s strong uptrend during the past year has seen the price not only double but even accelerating since its latest correction last month. On daily charts, RSI divergence seems to be building which could indicate the short-term risk of the uptrend becoming exhausted, however, a trend change is not in the cards.

Source: Saxo Group

Brent and WTI crude oil both lagged the momentum seen across metals and agriculture, and despite increased calls for +70 dollar Brent, the market has sensibly adopted a wait-and-see approach. Before drifting lower, Brent got tantalizing close to $70/b, a level it briefly breached two months ago before suffering a 15% correction. The market, already supported by investment demand, has also increasingly been focused on reopening’s in Europe and the U.S. driving a strong recovery in fuel demand.

Oil bulls, however, may have to remain patient given ongoing production increases from OPEC+, the prospect for a renewed Iran nuclear deal leading to increased production, and not least the current risk to demand in parts of virus-hit Asia. Since late March, Brent crude oil has traded within a four dollar wide uptrend, currently between $66.50 and $70.50.

Precious metals

Having failed on a handful occasions during the past couple of weeks, gold finally managed to mount an attack strong enough to take it above $1800. While lower U.S. real yields and a softer dollar provided the fundamental tailwind the yellow metal needed support from in-demand silver, one of the best performing commodities this week. During the past month, the continued rally across industrial metals have supported silver relatively more than gold. This can be seen through the gold-silver ratio which has been declining since late March.

Silver is currently trading within a rising channel and after hitting the upper end at $27.55 it may need to spend some time consolidating before mounting a fresh upside attempt towards the 2021 high at $30. In order for gold to continue higher, it first needs to establish support above $1795 before chasing after long-term trend following short positions. The next level of upside interest is $1851, the 200-day moving average and 61.8% retracement of the January to March sell-off.

Source: Saxo Group

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

Silver Takes Charge with Gold a Reluctant Follower

What is our trading focus?

Spot Gold (Ticker: XAUUSD)
Spot Silver (Ticker: XAGUSD)
Gold/silver ratio (Ticker: XAUXAG


Silver broke out of its triangular formation yesterday to record its best day since February 1 when it briefly spiked above $30. Gold meanwhile got rejected once again as it continues to struggle finding enough momentum to break above the key $1800 level. Overnight both trades softer with the stronger dollar off-setting a ten-week low in U.S. 10-year real yields at –0.83%.

Rising growth expectations together with the prospect for governments supported infrastructure plans as well as the green transformation and reflation focus have all helped drive a strong rally across industrial and platinum group metals in 2021. Silver has been caught between two chairs with the market struggling to work out whether the impact from industrial metals should hold a bigger sway than struggling gold. The latter due to its sensitivity towards movements in rates and the dollar, both of which up until recently had been going higher.

On the back of the recent strong performance across industrial metals, silver ended up taking the lead with yesterday’s trigger being the combination of weaker than expected U.S. ISM Manufacturing and higher ISM Prices Paid. The renewed pull from surging industrial metals can be seen through the gold-silver ratio which has been in a downtrend during the past month. From above 70 ounces of silver to one ounce of gold on April 1 it has since declined to a seven-week low at 66.5.

Comment from Kim Cramer Larsson, our technical analyst:
“Silver rallied almost 4% yesterday and closed above the resistance level around $26.65/oz, thereby confirming the uptrend which started back in early April. RSI is above the 60 threshold which support the bullish sentiment and only a close below $25.7 will demolish this short-term bullish scenario.”

Source: Saxo Group

While the double bottom in gold was confirmed on the recent break above $1765, the lack of follow-through and now multiple rejections below $1800 has left traders somewhat bewildered. The short-term technical outlook however still looks promising above $1765 and a break above $1800 could signal a move towards the $1818 and $1833, an area that undoubtedly would begin to shake out long-held trend following short positions.

 

Source: Saxo Group

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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

Speculators Keep Piling Into Agriculture Commodities

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, April 27. A week where U.S. index futures resumed their ascent, the dollar continued lower while US Treasury yields ticked higher, while staying within their established ranges. Commodities surged higher led by very strong gains in grains and soft commodities.

Commodities

Money managers increased bullish commodities bets with the total net long across 24 major commodity futures rising by 4% to 2.5 million lots, representing a nominal value of $137 billion. This in response to a 3.6% rise in the Bloomberg Commodity index to a fresh ten year high. The bulk of the increase was concentrated in grains and soft commodities which rallied by 8.6% and 7.3% respectively. The biggest individual position increases was seen in sugar, coffee, wheat, gas, oil and copper.

Energy

The combined net long in crude oil reached a six-week high at 677k, with the increase being led by WTI while speculators kept an almost unchanged position in Brent, primarily due to an increased amount of naked short selling. The biggest change was seen in gas oil where the net long came close to a one-year high.

Latest: Crude oil futures trade lower for a second day with the uneven demand recovery creating a somewhat challenging outlook. In India, April gasoline demand fell to the lowest level since August and increased curbs on mobility may trigger further declines into May. This at a time when higher fuel consumption is being recorded in the U.S., China and the U.K. and OPEC+ during the next three months begins to add barrels back into the market. The outlook is further being clouded by uncertainty about U.S. production growth and Iran nuclear negotiations where a deal could trigger rising production. For now, Brent crude oil trades within an ascending channel, currently between $64 and $69.

Metals

A relatively quiet week in precious metals with gold’s failure to build on the recent break above $1765 attracting fresh short selling resulting in the bulk of the 6k reduction in the net long being driven by new short positions. Silver length increased by 8% and platinum by 25% on tailwinds from surging industrial metals. The 6.3% rally in HG copper helped attract new longs with the net rising by 23% to 55.5k lots, still well below the December peak at 91.5k lots and the 2017 record at 125k lots.

Latest: Gold (XAUUSD) and silver (XAGUSD) continue to frustrate bulls and bears alike given their inability to break current ranges. Both trading higher today after surviving another downside attempt on Friday when the dollar suddenly jumped. US Treasury yields continue to trade range bound with rising breakeven (inflation expectations) being offset by lower real yields. Speculators cut length in COMEX futures last week while ETF holdings remain stuck near a one-year low. Current range in gold being $1755 to $1800.

Agriculture

Most of the speculative buying last week was concentrated in the agriculture sector (ex. livestock) with most grains and softs contracts seeing strong gains. Most noticeable being the strong gains in corn, wheat, sugar and coffee with dry weather in South America and the U.S. plains hurting the production prospects. The combined long in corn, soybeans and wheat reached a fresh record and with the latter well below previous peak positions, further length could be added over the coming weeks. In softs, the coffee long almost doubled while the sugar long jumped by 15% to 258k lots, the third highest exposure on record.

Latest: The Bloomberg Grains Spot index, already at an 8 year high continues higher today led by corn (CORNJUL21) and (WHEATJUL21). In corn, the spread between the July (old crop) and December (new crop) contracts has widened to 115 cents per bushel, and it highlights the current stress in the spot market as a powerful La Nina disrupts harvests in Brazil with dry weather cutting the production outlook by 8% to 104m tons. Adding to the current unease has been record Chinese imports while US planting progress and weather developments will be watched for clues as to the direction of the new crop contracts, such as December. Weekly U.S. planting progress data due later at 20:00 GMT

Forex

Broad speculative dollar selling lifted the net short against ten IMM currency futures and the Dollar Index by 30% to $10.3 billion, a six week high. The dollar was sold against all the major currencies with the bulk of the change being led by short-covering in Japanese yen where 11k lots ($1,3 bn equivalent) was bought.

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.

Start trading now

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

OPEC+ Set to Open Taps on Firm Crude Oil Market Expectations

What is our trading focus?

OILUKJUN21 – Brent Crude Oil (June)
OILUSJUN21 – WTI Crude Oil (June)


Crude oil reacted very calmly to the OPEC+ decision to proceed with plans to add more barrels from May and onwards while a surprise 4.3-million-barrel increase in oil stocks reported by the API was offset by equally large reductions in fuel stocks.

Despite a virus resurgence in Asia, led by India, which may cut the short-term demand outlook for fuel, OPEC+ still expects world oil demand will rebound by 6 million barrels/day this year. Agreeing with this assumption we find Goldman Sachs who sees 80 dollar oil within six months based on expectations for the biggest demand increase ever seen for a six month period. With these expectations in mind OPEC+ agreed to proceed with its roadmap for increasing output by 2 million barrels/day over the next three months.

While demand is expected to rise strongly, the persistence of Covid-19 cases rising in a number of countries, most noticeable in India and Latin America, raise the risk of another false start as already seen on a couple of occasions in December and March.

Brent has been in a recovery mode since the March sell-off with the price stuck in a five dollar upward sloping range currently between $63.50 and $68.50. Inside this range, the 21-day moving average, currently at $64.90 has been providing some local support.

In our Q2 outlook we wrote: “While Brent is likely to end 2021 somewhere in the $70’s we remain skeptical about the timing as we watch a market that is increasingly in need of a time to cool off and to consolidate. Whether it will be given such a break depends on the speed with which OPEC+ adds barrels back into the market and a continued vaccine-led recovery in global mobility”.

Until we see a meaningful suppression of the virus, we see Brent struggling to break above the January 2020 high at $71.75. With continued outbreaks seen across the world, jet fuel demand, which pre-covid accounted for close to 10% of global demand, is likely to see a prolonged road to recovery, while diesel (economic activity) and gasoline (rising mobility and avoidance of public transportation) look set to continue to rise strongly.

Before today’s FOMC meeting which may impact fuel prices given the link to the dollar, Energy Information Administration will publish its Weekly Petroleum Status Report at 14:30 GMT. Last night the American Petroleum Institute showed a bigger than expected jump in crude oil stocks being offset by equally bigger reductions in fuel stocks. The market will also be looking for further signs of increased mobility through the implied demand through products supplied. Especially gasoline which is getting tantalizing close to break above the psychological 9 million barrels/day mark. As per usual I will published the result and charts on my Twitter profile @ole_s_hansen.

Source: Bloomberg, EIA, API & Saxo Group
Source: Bloomberg, EIA, API & Saxo Group

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