(Bloomberg) -- Hedge funds' speculative positions are at “pretty elevated levels” in commodities amid signs of ample inventories in some materials and concerns over the outlook for demand in China, according to JPMorgan Chase & Co.
Momentum measures and futures positioning in some assets are likely to turn “incrementally more negative,” especially for base metals, said Nikolaos Panigirtzoglou, global market strategist at JPMorgan. In March, the Bloomberg Commodity Index posted the biggest monthly loss since July. These charts show why a sell-off among hedge funds could emerge in coming months.
1. Crude Retrenchment
Speculative positions in crude oil “have declined from overbought to average levels, but we see a risk of further downshifting,” JPMorgan said in a March 31 report. “In all the previous swings, oil positions did not stay at average levels, but swung from overbought to oversold levels and vice versa.”
2. Short Interest on Stocks
Speculators have been reducing short interest on the biggest commodity equities. A review of five of the biggest global commodity stocks shows short interest in those companies has slipped significantly since last year, which Panigirtzoglou said suggests the sector may be overbought.
| Stock | % Change in Short Interest (Jan. 4, 2016-March 31, 2017) |
| BHP Billiton | -14 |
| Rio Tinto | -77 |
| Glencore | -88 |
| Vale | -74 |
| Barrick Gold | -90 |
Source: Data compiled by Bloomberg, Markit data
3. Palladium Signals
Speculators have been bullish on palladium. Net-long positions in futures and options contracts are at elevated levels, and the commodity appears “overbought,” Panigirtzoglou said. Futures of the metal used in automotive pollution-control devices touched the highest in two years on Wednesday, even after carmakers posted a surprise sales decline in March as discounts failed to buoy demand.
4. Metals Momentum
Copper has also shown signs that momentum could turn negative. The ratio of copper net-long positions to the metal's open interest is near the highest since at least 2006. Futures reached the highest since 2015 in February, and have since struggled to regain momentum amid concerns about demand prospects. If the price remains in the current range, the momentum signal will “inevitably turn negative” some time close to May, Panigirtzoglou said. The price of copper for delivery in three months fell 0.6 percent to close at $5,858 a metric ton Thursday on the London Metal Exchange.
5. Cotton Divergence
Traders have piled into cotton, buoyed by demand prospects from China and the outlook for a third straight annual deficit that is trimming global stockpiles. Yet speculators may see near-term price pressures amid expectations for higher production. The surge in cotton prices is likely to boost U.S. plantings, the U.S. government said last week. While net-long positions in futures and options have held near a record reached last month, Commodity Futures Trading Commission data show, futures prices have slumped for two straight weeks.
--With assistance from Aoyon Ashraf Marvin G. Perez and Luzi Ann Javier
To contact the reporter on this story: Susanne Barton in New York at swalker33@bloomberg.net.
To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, Joe Richter, Steven Frank
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