Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities and forex during the week to last Tuesday, December 5. It was a week where equities and commodities continued to move in opposite directions, with demand worries and a stronger dollar weighing on raw materials while a continued decline in bond yields supported the stock market. Since hitting a record high in June 2022, the commodity sector, except precious metals, has suffered broad decreases, resulting in the hedge fund long collapsing to levels seen during the Covid-19 crisis in early 2020, highlighting an under-owned sector which, given the right circumstances may see a strong recovery in 2024.
The commodity sector continued lower during the reporting week, with the Bloomberg Commodity Index suffering a 2.4% loss with all industries, except grains, seeing broad declines, led by the energy sector where crude oil prices dropped by more than 5% as Brent and WTI headed for their worst succession of losses since 2018. Only a handful of commodities, led by wheat, corn and coffee, traded higher during the week.
Overall, these developments saw money managers, which include hedge funds and CTAs (commodity trading advisors), being net sellers of 18 out of the 24 major commodity futures tracked in this report, resulting in the net long position suffering a 22% decline to just 506,000 contracts, the most miniature net long since the depth of the Covid-19 crisis back in March and April 2020. Since hitting a record high in June 2022, the Bloomberg Commodity Total Return index has retraced less than 40% of the 130% strong surge between 2020 and 2022. During the same time, the net long position held by speculative traders has collapsed by 82% from a record peak of 2.7 million contracts back in February 2021.
Since the mentioned price peak in June 2022, most sectors have suffered significant setbacks led by a 52% decline in the energy sector (-17% ex natural gas), with grains and industrial metals suffering a +23% decline. Against these trends, the precious metal sector trades up around 8% while the softs sector remains flat.
These developments highlight an increasingly under-owned asset class that struggled in 2023 amid growth worries in China and the wider world and a sharp rise in funding costs, leading industries to reduce excess inventories. Given the right circumstances, it also highlights a sector that may see a strong recovery in 2024 once the technical and/or fundamental outlook becomes more supportive, leading to fresh buying and short-covering from speculators. Drivers that may trigger such a change could be rate cuts lowering the funding costs and, with that, the inherent contango leading to industry restocking of inventories, OPEC maintaining tight control of the supply of crude oil, and, not least, signs of tightness across essential commodities that may continue to attract attention.
WTI and Brent continued selling with the comb. Net long slumping to 231k contracts, the lowest since March 2020 and down 58% from the September 19 peak at 560k contracts. In WTI, the long/short ratio has now collapsed to 1.7 longs per one short, and a level that has triggered a reversal (fresh longs, reduced shorts) since 2015.
The correction in gold to $2019 after hitting a record $2135 peak only triggered a slight 8% reduction to 133k contracts, the bulk being long liquidation with little appetite for selling the metal short. The silver long was cut by 12% to 22.9k, platinum flipped back to a net short, while copper saw a small amount of buying, with long and short positions both seeing a reduction.
