ICE sugar futures prices continue to retreat today in early trade after posting an 18-month high late last week. The negative tone to today's trade was fuelled by the weekly commitment of traders' (COT) report released Friday evening that showed a strong build-up in the 'managed money' net long position.
Speculative funds extending 'longs' a volatile recipe
On Friday night the COT report confirmed that 'managed money' funds had increased their net long position in the sugar market to 193,340 contracts (a 19,550 contract gain week on week). The currently positioning being a 2 � year high.
What is interesting is that the weekly reporting period was, as usual, recorded from Tuesday to Tuesday where the front month Jul-16 contract retreated 23 points. Since then, the market has rallied 64 points (or 4%) suggesting that again, in the days following last Tuesday, we will have seen a strong build-up in speculative length to fuel the market's rise.
Typically, when there is a large build-up in the length of bought or sold positions by non-commercial traders the market may be prone to a reversal.
Tobin Gorey at the Commonwealth Bank of Australia's notes that 'the report might well trigger some early selling today. A huge investor long is not usually a recipe for a further rally because at some point they sell to realise their profits.'
Rally fuelled by growing deficit projections
Last month's 19% rally from 14.28 cents a pound to 17.00 cents a pound was, in part, sparked by numerous analysts' calls flagging an increasing global supply deficit in the coming year.
Prominent market analyst Platts Kingsman have now joined the party. Today Platts Kingsman increased their projection for the 2016/17 deficit to 7.67m tonnes, a 20% increase from their previous call of 6.38m tonnes.
UNICA report to provide guidance
Later today UNICA is due to report on Brazilian harvest progress for the second half of April. For those of us still firmly sitting on the fence, these figures should provide some short-term guidance for a market at crossroads.
Bulls will maintain that strong Brazilian production won't be enough to offset production deficits from other key areas, namely Thailand and India. Bears will point to a market over-bought by non-commercial traders that is prone to retracement, especially in the face of stronger production from the world's largest producer and exporter, Brazil.
As always, time will tell who wins this debate.
