COT: Bullish Bets Across All Five Crude Oil And Fuel Products Rose

This summary highlights futures positions and changes made by hedge funds across commodities and forex during the week to Tuesday, December 27. A week that despite seeing activity grind to a near halt ahead of yearend saw speculators showing a continued interest in adding exposure to commodities, led by oil, gold and corn, while the yield on 10-year US Treasuries climbed. Developments both driven by an improved outlook for demand in China as the economy reopens following months of lockdown restrictions. The Nasdaq dropped 2.3% as it headed towards a 33% annual slump while continued selling of the dollar primarily benefitted the euro and the Japanese yen.

Commodities

The Bloomberg commodity index traded higher by 1.3% during the reporting week as it headed for another strong yearly gain, not least driven by tight markets keeping most futures contracts in a state of backwardation. While the Bloomberg Spot index ‘only’ delivered a 6.8% return last year, the tightness and with that elevated backwardations especially during the first half of the year helped drive the BBG Total Return index, which included the positive carry of selling (rolling) an expiring contract at a higher price than where the next month was bought, to an annual return of 16%.

During the reporting week all but one of the 24 major commodity futures tracked in this saw net buying, resulting in the combined net long rising by 16% to 1.4 million lots, a six-month high. Two-thirds of the increase was driven by fresh longs being added while the remaining third was driven by traders cutting back on short positions. With all sectors getting bought with natural gas the only exception, the driver behind these developments has to be found in overall macroeconomic developments, most notably the weaker dollar and emerging optimism about the demand outlook in China.

Energy

Bullish bets across all five crude oil and fuel products rose, driven by a combination of fresh longs being added and reduced short positions. Biggest change was seen in Brent where a 44% jump, the biggest in 17 months, lifted the net long to 144k lots, a seven-week high. The continued collapse in natural gas, despite the pre-Christmas winter freeze, helped boost the net short by 63% to 59k.

Crude oil futures ended a volatile 2022 close to unchanged after having traded within the widest range since 2008. Another volatile year undoubtedly lies ahead with multiple uncertainties still impacting supply and demand. The two biggest that potentially will weigh against each other in the short term remain the prospect for a recovery in Chinese demand being offset by worries about a global economic slowdown. Covid fears, inflation fighting central banks, lack of investments into the discovery of future supply, labour shortages and sanctions against Russia will also play its part in the coming months.

 

The gold long reached 67.3k contracts, and highest since early June, primarily driven by short sellers scaling back exposure in frustration over the yellow metals ability to weather a fresh rise in US bond yields. While gold has yet to make a decisive break to the upside the sentiment has nevertheless changed from a sell-into-strength to a buy-into-weakness market.

Having closed 2022 near unchanged despite massive headwinds from a stronger dollar and surging treasury yields, the outlook for 2023 looks more price friendly with recession and stock market valuation risks, an eventual peak in central bank rates combined with the risk of inflation not returning to the expected sub-3% level by yearend all adding support. In addition, the de-dollarization seen by several central banks last year, when a record amount of gold was bought, look set to continue, thereby providing a soft floor under the market. As always, the dollar and yield movements will be a key focus while in the short term the market will look ahead to Wednesday’s FOMC minutes and Friday’s US job report. 

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Agriculture

The prospect of a reopening in China giving demand a boost helped drive continued demand for key crops with speculators raising bullish bets across the six main grain and soy contracts to a four-week high at 429k contracts, well below the April peak at 819k contracts when panic buying in the aftermath of the Russian invasion of Ukraine saw prices surge higher. The change was primarily driven by a 40% boost to the corn net long to 159k contracts while the soymeal long reached 130k contracts, just shy of the 2018 record at 134k.

In softs, the sugar net long jumped to 258k contracts to a 16-month high and not far from the peaks in 2016 (286k) and 2021 (270k) which both ended up signaling months of subsequent selling. The cocoa position flipped back to a small net long after 19k contracts were added in a week that saw the price jump 5.4%.

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