Brent crude and wheat futures prices are particularly vulnerable to snap change in sentiment.
A look at market positioning in among managed money accounts in commodity futures and options markets can give a flashing red warning light that a market is too heavily bought or sold and so vulnerable to a sell-off, or a rebound.
Brent crude positions are currently flashing red with the net position sharply higher relative to its 5-year peak. The ratio of long positions to short positions currently looks extreme at 6.4 longs to 1 short. Previous occasions when the ratio has reached 6 has been followed by a sell-off in Brent crude prices.
Oil prices have risen sharply from their late January lows as signs of slowing supply growth in the US as well as increased crude demand, while global oil production capacity has dwindled as Saudi Arabia pumps oil at a record rate.
At the other end of the scale is wheat. Sentiment in US wheat prices has been undermined by soft US export demand, dented by dollar strength, which has made the country’s shipments less competitive. However, selling has gained more momentum recently as rains have begun to reduce the extent of drought.
The net short that hedge funds held in Kansas City hard red winter wheat, at 11,418, was by far the largest on record, beating the 7,866 lots set in July 2013.
Be prepared, or even better positioned for a change in sentiment.