Bearish commodity trades are rising

Speculators taking out short positions have reached a record high on US crude oil and high grade copper.

Oil barrels
Source: Bloomberg

The number of short positions by speculators on WTI (US crude oil) has reached a record high. Traders are not being deterred by the low price of oil to go short. Over the past year, speculators have ramped up their short positions by 68%, and in the same time period, WTI dropped by 54%. The spike in traders going short in early December coincided with the OPEC meeting, and since then shorts increased by 19% and the price of WTI has fallen by 28%. 

Traders taking short positions on Brent crude have also increased as the energy market keeps sliding. In contrast to WTI, the amount of shorting by speculators has actually decreased in the past 12 months by over 15%, but the price of Brent has fallen by 49.9% in the same time. The latest Commitment of Traders report states the number of short positions by traders stands at 129,083 contracts, which compares with the record high of 163,923 (September 2014). Brent traders increased their short positions post the OPEC meeting by 1.6%, and the market has dropped by 33% since. 

High grade copper has witnessed a record number of speculators taking short positions on it. Over the year, the number of short-sells by traders has jumped by 33% and in the same time period the metal has dropped by 23%. Traders are clearly bearish on copper as short positions are rising all the time while copper prices are falling to levels not seen since 2009. 

Gold has been stuck in a bear market for four years but the short speculators are working hard for their money. Gold is less swayed by speculators and large swings in the number of short trades by hedge funds are having much less impact on the price of the metal. Gold dropped 16% in the past year, but shorting by traders climbed by 87%. Between 20 January 2015 and 22 July 2015, the amount of new short positions rose by 162%, but gold only declined by 15.8%. Gold rallied 9% between 5 August and 16 October, and during that timeframe shorting fall by 44%. 

The spike in the gold-to-oil ratio has occurred at several key moments in the past few decades, and it has now hit a record high. Traders are wondering which came first, the spike in the ratio or the crisis? I feel the jump in the gold-to-oil ratio is a product of a crisis and not a cause of it, but there are some lessons to be learned from prior events.

Falling global demand for oil is playing a part in the slump, but so is the intentional oversupply by OPEC nations. Cheap oil is weighing on inflation which will hold back the Federal Reserve from hiking rates, and this is propping up gold. A prolonged period of low inflation could harm the global economy and that is the worry. A drop in world growth will send oil lower, equity markets will slide and gold will attract the risk-off money, and the gold-to-oil ratio will keep getting bigger.

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