Commodity liquidation accelerates
Another week of broad commodity weakness, which saw the Bloomberg Commodity Index fall 2.5%, triggered a fifth consecutive week of aggressive selling by managed money accounts.
During the past five weeks, the combined net long across the 25 major commodity futures tracked in this report has collapsed by 73% to just 478,000 contracts. Although this provides a useful gauge of investor sentiment, it does not fully capture changes in capital exposure because energy and metals carry substantially larger contract values than agricultural futures.
The speed of the reduction illustrates how rapidly investor sentiment has deteriorated as stronger dollar conditions, higher funding cost expectations and the recent tumble in energy prices have weighed on that sector but also grains, oilseeds and sugar through their biofuel and ethanol links to fuel prices, all encouraging broad risk reduction.
Energy longs continue to unwind
In nominal terms, the energy markets remained the main source of liquidation as traders adjust positioning away from the biggest disruption in living memory to a near-term oversupply as a mini-tsunami of barrels are being released from the Persian Gulf.
The combined hedge fund net long across WTI and Brent crude oil futures fell by another 36,300 contracts to 178,800 contracts, the lowest level in six months and 68% below the March peak when Middle East war and closure of the Strait of Hormuz drove prices sharply higher and encouraged expectations of an increasingly tight oil market.
The scale of the recent reduction in net positioning, driven not only by fundamental changes but also by a sharp deterioration in the technical outlook, has encouraged a major build-up in gross short positions in Brent to near record levels.
Metals show surprising resilience
Despite another difficult week for prices, speculative positioning across industrial and precious metals remained relatively stable.
This suggests hedge funds have so far shown relatively limited appetite to chase prices materially lower, potentially reflecting the view that the recent correction remains driven more by macro developments than a deterioration in longer-term supply and demand fundamentals.
Copper, which briefly broke below important technical support near USD 6.15 per pound, only experienced a modest 3% reduction in an already elevated net long position.
Agriculture completes a dramatic reversal
Agriculture once again accounted for the largest share of speculative liquidation. Since reaching a four-year high of more than one million contracts only last month, the combined net position across 13 major agricultural futures has swung to a net short of 49,000 contracts.
The reversal has primarily been driven by an 867,000-contract reduction in bullish exposure across corn, soybeans and wheat, leaving the combined grain position close to neutral. Additional selling in sugar and lean hogs was only partly offset by renewed buying in cocoa, coffee and cotton.
The speed of this reversal highlights how rapidly speculative sentiment has shifted as favourable weather, lower energy prices reducing bio-fuel linked support, improved crop prospects and a stronger dollar encouraged widespread long liquidation across the agricultural sector. However, with positioning now much lighter, the market may be more sensitive to any adverse weather developments during the critical growing season for corn and soybeans, potentially increasing the risk of a rebound in prices.