Article / 04 September 2017 at 8:05 GMT

COT: Heavy selling of oil, gold bought on break — #SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • Funds cut bullish bets across major commodities by 9% in week to August 29
  • 'The 105,671-lot drop in the WTI net-long was the biggest weekly drop on record'
  • Gold breaking north of $1,300/oz triggers net-long expansion
North Korea
A fresh round nuclear weapons testing by North Korea 
is adding momentum to the gold rally. Photo: Shutterstock

By Ole Hansen

Hedge funds cut bullish bets across major commodities by 9% in the week to August 29. Both precious and industrial metals continued to attract buyers while short sellers in WTI crude oil returned as the third bull cycle attempt this year increasingly showed signs of failing. 

Speculative positioning in Commodities
Selling of WTI crude oil accelerated as Hurricane Harvey knocked out refinery demand along the Texas Gulf Coast, thereby causing a dramatic drop in demand for crude oil. The 105,671-lot drop in the WTI net-long was the biggest weekly drop on record and was primarily driven by fresh short-selling as the third bull cycle attempt this year was aborted. 

Gasoline, which surged higher, only saw a modest one-third increase in the net-long. A figure that is likely to have increased following last Tuesday as flooding and refinery closures continued to spread. 

Speculative positioning in WTI Crude oil

Gold’s break above $1,300/oz triggered fresh buying with the net-long rising 18% to 232,000 lots, the highest since September 2016. The ratio between long and short positions has jumped from 1 to almost 19 in the past few weeks. This, the highest ratio since December 2012, could become an issue should gold break back below $1,300/oz but for now it mainly demonstrates the extent to which the market continues to turn bullish. 

The North Korean nuclear test over the weekend has further increased demand for safe-haven assets such as gold. So far this Monday it has reached an 11-month high thereby trading above the spike from night of the US election back in November. 

Gold and long/short ratio
Silver has struggled to keep up with gold despite the potential support from surging industrial metals. This has been viewed as a sign that gold’s relative support has come from diversification and safe-haven demand related to North Korea, Trump uncertainty, and dovish central banks. 

As a results its net-long remains 47% below the April record while gold only needs to add another 20% before eclipsing its record from June 2016.

Speculative positioning in metals
Soft commodities were bought with continued coffee selling being offset by short-covering in sugar and cocoa and fresh buying of cotton. The latter development came in response to worries that Harvey-related flooding could reduce this year’s crop.  

Soft commodities
Grain traders continued to adjust to the price collapse witnessed during the past month. New life-of-contract lows in both December wheat and corn futures supported continued short selling. 

CBOT grain and soybeans
COT data covering Brent crude oil and gas oil will be released by the ICE Europe Exchange Just before 1100 GMT today. Updates to follow below. 

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank

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