Hedge funds' sell-off undermines commodity fundamentals

Published by ChAI
Mar 29 2023

While the markets for specific commodities have their own fundamental supply and demand drivers, there are some factors which can affect a broad array of commodities at once. This has been recently evidenced by hedge funds selling their positions across energies, metals and grains. Over the past few weeks, there have been reverberations across the global economy stemming from the collapse of Silicon Valley Bank in early March. The most notable of these was the government-arranged acquisition of Credit Suisse by its rival UBS, a move that took place in rapid time in order to prevent the former bank’s collapse. These financial flashpoints have heightened awareness surrounding the potential impacts of the relentless interest rate increases that many central banks, including the Federal Reserve, have pursued over the past year. As a result, many hedge funds have retreated from their riskier assets, which has led to a sell off that has been noticeable across the board within commodities.


A few weeks ago, the Financial Times hosted its Global Commodities Summit in Lausanne, Switzerland. Many of the stories to hit the papers both during and after the conference cited bullish energy price forecasts from attendees, none more so than Pierre Andurand’s prediction of $140 per barrel for Brent Crude by the end of 2023. While not quite as extreme, Goldman Sachs updated its Brent forecast to average at $97 during H2 2023, slightly down from its earlier prediction of $100.

The predictions for crude oil prices to be near, or above, three figures later this year may yet be proved correct, however it seems hedge funds are not convinced right now. As reported by John Kemp for Reuters, the change in positions across the 6 most actively traded oil contracts during the 2 weeks from March 7th to March 21st is the largest to occur over the last decade. As the convergence of the orange and purple lines in the graph below shows, the net long position for non-commercial positions on Brent contracts shrunk by over 65,000 contracts in a week; more than 65 million barrels.

Brentpositions ChAI’s Driver Detail chart showing Non-Commercial ICE Positions for Brent

The bearish shift in oil markets comes at a time where there are plenty of bullish supply-side factors, such as limited access to Russian oil and the anticipated return of demand from China. That funds were still so keen to sell their positions signifies the risk-averse attitude triggered by the fears of a global banking crisis.


In the metals space, investors have gone one further than in the oil market, and have now built up a net short position on copper. The red metal is often viewed as an indicator for the health of the wider economy, earning the nickname ‘Dr. Copper’, and following that logic it seems that the speculative community are uncertain about the future.

The graph below shows positioning data for copper contracts on COMEX; notably, the net position switched from bullish to bearish in the week ending March 7th for the first time since October 2022. On the LME, Investment funds shed almost 20,000 contracts worth of bullish positions between the end of January and March 17th.

Coppercomexshortpositions ChAI’s Driver Detail chart showing Non-Commercial COMEX Positions for Copper

As with oil, the fundamental factors in the copper market suggest a bull run should be imminent, and yet this has not translated into recent speculative activity. The recovery of the Chinese economy, as with oil, is expected to push prices upwards in H2 this year, while there is a massive demand increase forecast over the next decade to enable widespread transition to cleaner energy.


Finally, the agricultural markets have also been affected by the hedge funds’ recent exodus, with corn and soybeans experiencing notable sell-offs. As the graph below shows, non-commercial positioning on CBOT corn contracts flipped to bearish in early March, marking the first time this has happened since September 2020. In soybeans, while the sell-off has not resulted in a net bearish position, the long position for non-commercials was reduced by over 76,000 contracts - equivalent to over 380 million bushels - between February 21st and March 21st.

Cornpositioningdatacbot ChAI’s Driver Detail chart showing Non-Commercial CBOT Positions for Corn

Grain markets in general have been under stress due the uncertainty surrounding the continuation of the Ukraine grain corridor. The existing deal for the protected corridor was due to end on March 18th, and has subsequently been extended, but there were complications in agreeing the length of the extension. In general, grain prices would be expected to increase given this uncertainty of supply, which runs against the bearish movement in the positioning data. Furthermore, the markets for both corn and soybeans are likely to be impacted by the historic drought that has gripped Argentina over the past few months, again threatening supply levels.

The last few weeks have shown the importance of considering as much data as possible when looking to forecast commodity prices. The supply and demand outlooks for oil, copper and corn all appear to be bullish on the surface, and yet the rapid sale of exchange contracts by the managed money community has weakened pricing for all 3 commodities.

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