Recent moves in the commodity markets have finally begun to reset the balance between commercial and speculative traders. The commercial traders in the metal markets are clearly re-purchasing the forward short hedges implemented on this summer’s rally, climaxing at the August highs. Notice in the table that both the net, and total commercial positions have both moved toward zero.
This is exactly the type of washout that is expected when a market is being pushed by speculators, rather than the true price discovery that occurs between the commodity producers and the commodity processors. We also see this type of action setting up in the crude oil, U.S. Dollar Index and interest rate markets.
The recent push towards $53 per barrel in the crude oil market has been met by massive forward selling as crude oil producers attempt to balance generating enough cash flow to keep running, while selling the bare minimum forward at prices that are a net loss. Crude oil processors helped stem the tide of falling prices by stepping up to the buy side at $40 per barrel, but since this spring, the oil rally has been purely speculatively driven. In fact, once the market hit $49 at the beginning of October, commercial producers immediately sold more than 100,000 contracts, increasing their net short position by more than 4% in less than three weeks. The speculative washout has quickly pushed the market back to the mid $40s, and based on the actions of the commercial traders, it looks like it will remain range bound between $40 and $50.
The Dollar Index has also exhibited a similar pattern on the recent push above 99. The spread between the speculators betting on a stronger dollar and the commercial traders on the sell side reinforcing the resistance at 100 grew by more than 90,000 contracts in three weeks. It has been five years since the dollar positions between these groups moved this far, this quickly.
Finally, the interest rate sector has been driven lower, toward long-term technical support, especially in the Eurodollar. The support noted in the September issue at 98.80 appears to have held. The recent low of 99.01 attracted sufficient commercial buying to push both their net and total positions towards their highs. The massive turnover in interest rate positions leaves the speculators now short as the commercial traders are not only covering their pre-Brexit short trades but also clearly betting on one more rally in interest rate prices and drop in yield, by year-end.