Cracking, basis and short selling: How will these three "invisible brakes" rewrite this week's market?
2025-08-11 20:59:21
Commodity markets diverged this week amidst a confluence of geopolitical and policy uncertainties. Analysis reveals three key themes: First, the decline in the sanctions risk premium for crude oil, resonating with weak fundamentals in refined product cracking, has suppressed price elasticity. Second, the abnormal basis between New York gold and London spot prices has fallen following the correction of the "tariff misinterpretation," but the process of recovery is not yet complete. Third, the combination of restricted Black Sea grain liquidity and upward revisions to Russian supply, coupled with a high concentration of short positions, has significantly amplified the short-term elasticity of grain prices.
According to Reuters, the deadline set by Trump for the Russia-Ukraine peace agreement has expired, but he has not imposed stricter sanctions on Russia. The market is now focusing on the policy signals from his meeting with Putin this Friday. This "missing step" has temporarily reduced the sanctions risk premium in the oil market. Analysts believe that any easing of the situation is likely to further weaken the sanctions premium, putting downward pressure on prices within the context of "bearish fundamentals." On the market, Brent has fallen to its lowest level since early June, retesting the low point of its range, with the premium being the main driver.
Funding and positions indicate a growing caution among speculative bulls: As of last Tuesday, net long positions on ICE Brent decreased by 20,375 contracts to 240,977, driven primarily by long position reductions. Net long positions on ICE Gasoil also decreased by 14,637 contracts to 86,007. Long deleveraging makes it more susceptible to a negative feedback loop in the face of negative price fluctuations: "weak prices – passive selling – even weaker prices." Fundamentally, weakening ICE Gasoil cracks and term spreads indicate weakening marginal refinery demand and inventory structure. The decline in crack spreads is being transmitted upstream through processing margins, dampening the marginal impact on crude oil prices. The weak term spread suggests a easing of near-term tightness and the risk of a "near-term weak, long-term strong" curve. On the supply side, the US oil and gas rig count rebounded last week for the first time since April, increasing by 1 to 411 (Baker Hughes). Although activity levels have fallen significantly from previous highs, prices have stabilized and the downward slope has slowed. The weakening of supply elasticity is slowing, helping to contain sharp price increases.
Strategically, analysis favors shorting on rebounds, focusing on fundamental analysis through term spreads (near-term weakness, long-term strength) or crack spreads. Directional analysis can utilize put spreads or necklines to mitigate theta depletion and gap risk. Regarding risk management, net exposure should be reduced before and after the meeting, with attention to short-term volatility caused by headline risk and the amplifying effect of gamma risk and intermittent liquidity contraction on stop-loss orders.
Influenced by a Financial Times report, the market initially believed that imported 1kg gold bars, the most commonly traded commodity on the Comex and a major Swiss export to the US, would be subject to US tariffs. Following the announcement, the premium of New York gold futures (December contract) over London spot gold sharply widened to its highest level since the pandemic, exceeding $100. Subsequently, following news that the White House would issue an executive order clarifying the situation and potentially exempting gold bar imports from the tariffs, the premium declined significantly.
Mechanistically, this round of spread widening isn't a traditional supply-demand mismatch, but rather an EFP/basis shock caused by policy uncertainty. When expectations of delivery and deliverable product restrictions suddenly tighten, marginal supply on Comex relative to London is inherently constrained, leading to a rapid widening of the futures premium. With these revised expectations, arbitrage and hedging positions return (selling futures/buying spot or shifting positions), and the basis subsequently recovers. Given the lack of clarity surrounding the executive order, analysts expect the recovery to be gradual rather than sudden.
Strategically, basis/arbitrage trading should primarily focus on shorting rallies, with strict stop-loss orders for reverse expansion. Any new developments regarding deliverable scope, tariff codes, or origin determinations could trigger secondary shocks. We recommend maintaining a light position, entering and exiting quickly, and combining cross-period and cross-market hedging to mitigate tail risk. Amidst fluctuations driven by tariff misinterpretations, the direction of gold prices is less crucial; capitalizing on changes in basis and liquidity premiums is more cost-effective.
On the supply and demand front, data from the Ukrainian Ministry of Agriculture shows that grain exports in the 2025/26 season, as of August 8, were 2.1 million tons, a year-on-year decrease of 55%. This included 706 thousand tons of corn (-62% YoY) and 1 million tons of wheat (-49% YoY). Harvested grains and pulses totaled 20 million tons, down from 27.3 million tons in the same period last year. Meanwhile, in Russia, IKAR raised its soft wheat production forecast for the 2025 harvest to 84.5 million tons (previous estimate: 84 million tons) and increased its exports for the 2025/26 season by 0.5 million tons to 41.5 million tons, primarily due to slightly better-than-expected production in the Mid-Volga and Central regions. This combination suggests significant regional disparities in Black Sea supply: Ukraine's marginal contribution to global supply has declined due to logistical and production constraints, while Russia has offset some of the shortfall with slight upward revisions to production and exports, easing the tension in the global wheat balance sheet.
Regarding funds and positions, CFTC data shows that as of August 5th, net shorts in CBOT wheat increased to 80,769 contracts (+15,445); net shorts in CBOT soybeans increased to 65,930 contracts (+29,619), the most bearish since December 2024. This concentration of shorts has increased price resilience to unexpected positive news (such as weather, logistics, or policy news), potentially intensifying short-term short-covering. Strategically, wheat is neutral to slightly bearish amidst Russia's upward revision to offset Ukraine's contraction, making it more suitable to invest in medium-term short positions on rallies and use near-month call spreads to hedge short-term squeeze risk. With soybeans holdings at their most bearish, caution is advised against weather- or policy-driven surges. Consider selling the deferred month and buying the near-month to capitalize on term structure recovery, or employing inverse necklines to reduce holding costs. Risks lie in Black Sea shipping, inspection regulations, export rhythms, and reserve rotations and tenders by major importing countries. Maintaining diversified hedging and dynamic delta management is recommended.
In the energy sector, declining sanctions premiums and weakening refined product cracks continue to weigh on crude oil prices. Focus on marginal signals from Friday's Trump-Putin meeting and the evolution of the Brent term structure. Regarding metals, the New York-London gold basis may remain volatile pending policy clarification. Trade with discipline and a light position, centered around a "basis reversion." In agricultural products, the combination of sluggish Ukrainian exports and upward revisions to Russian wheat prices, coupled with concentrated short positions, is increasing volatility. Focus on structured and event-driven strategies, strengthening risk control and stop-loss mechanisms.
Energy: The cooling of sanctions premium and the weakening of crackdowns resonate
According to Reuters, the deadline set by Trump for the Russia-Ukraine peace agreement has expired, but he has not imposed stricter sanctions on Russia. The market is now focusing on the policy signals from his meeting with Putin this Friday. This "missing step" has temporarily reduced the sanctions risk premium in the oil market. Analysts believe that any easing of the situation is likely to further weaken the sanctions premium, putting downward pressure on prices within the context of "bearish fundamentals." On the market, Brent has fallen to its lowest level since early June, retesting the low point of its range, with the premium being the main driver.
Funding and positions indicate a growing caution among speculative bulls: As of last Tuesday, net long positions on ICE Brent decreased by 20,375 contracts to 240,977, driven primarily by long position reductions. Net long positions on ICE Gasoil also decreased by 14,637 contracts to 86,007. Long deleveraging makes it more susceptible to a negative feedback loop in the face of negative price fluctuations: "weak prices – passive selling – even weaker prices." Fundamentally, weakening ICE Gasoil cracks and term spreads indicate weakening marginal refinery demand and inventory structure. The decline in crack spreads is being transmitted upstream through processing margins, dampening the marginal impact on crude oil prices. The weak term spread suggests a easing of near-term tightness and the risk of a "near-term weak, long-term strong" curve. On the supply side, the US oil and gas rig count rebounded last week for the first time since April, increasing by 1 to 411 (Baker Hughes). Although activity levels have fallen significantly from previous highs, prices have stabilized and the downward slope has slowed. The weakening of supply elasticity is slowing, helping to contain sharp price increases.
Strategically, analysis favors shorting on rebounds, focusing on fundamental analysis through term spreads (near-term weakness, long-term strength) or crack spreads. Directional analysis can utilize put spreads or necklines to mitigate theta depletion and gap risk. Regarding risk management, net exposure should be reduced before and after the meeting, with attention to short-term volatility caused by headline risk and the amplifying effect of gamma risk and intermittent liquidity contraction on stop-loss orders.
Metals: Misreading and Return of the New York-London Basis
Influenced by a Financial Times report, the market initially believed that imported 1kg gold bars, the most commonly traded commodity on the Comex and a major Swiss export to the US, would be subject to US tariffs. Following the announcement, the premium of New York gold futures (December contract) over London spot gold sharply widened to its highest level since the pandemic, exceeding $100. Subsequently, following news that the White House would issue an executive order clarifying the situation and potentially exempting gold bar imports from the tariffs, the premium declined significantly.
Mechanistically, this round of spread widening isn't a traditional supply-demand mismatch, but rather an EFP/basis shock caused by policy uncertainty. When expectations of delivery and deliverable product restrictions suddenly tighten, marginal supply on Comex relative to London is inherently constrained, leading to a rapid widening of the futures premium. With these revised expectations, arbitrage and hedging positions return (selling futures/buying spot or shifting positions), and the basis subsequently recovers. Given the lack of clarity surrounding the executive order, analysts expect the recovery to be gradual rather than sudden.
Strategically, basis/arbitrage trading should primarily focus on shorting rallies, with strict stop-loss orders for reverse expansion. Any new developments regarding deliverable scope, tariff codes, or origin determinations could trigger secondary shocks. We recommend maintaining a light position, entering and exiting quickly, and combining cross-period and cross-market hedging to mitigate tail risk. Amidst fluctuations driven by tariff misinterpretations, the direction of gold prices is less crucial; capitalizing on changes in basis and liquidity premiums is more cost-effective.
Agricultural products: Black Sea mismatch and short concentration increase volatility elasticity
On the supply and demand front, data from the Ukrainian Ministry of Agriculture shows that grain exports in the 2025/26 season, as of August 8, were 2.1 million tons, a year-on-year decrease of 55%. This included 706 thousand tons of corn (-62% YoY) and 1 million tons of wheat (-49% YoY). Harvested grains and pulses totaled 20 million tons, down from 27.3 million tons in the same period last year. Meanwhile, in Russia, IKAR raised its soft wheat production forecast for the 2025 harvest to 84.5 million tons (previous estimate: 84 million tons) and increased its exports for the 2025/26 season by 0.5 million tons to 41.5 million tons, primarily due to slightly better-than-expected production in the Mid-Volga and Central regions. This combination suggests significant regional disparities in Black Sea supply: Ukraine's marginal contribution to global supply has declined due to logistical and production constraints, while Russia has offset some of the shortfall with slight upward revisions to production and exports, easing the tension in the global wheat balance sheet.
Regarding funds and positions, CFTC data shows that as of August 5th, net shorts in CBOT wheat increased to 80,769 contracts (+15,445); net shorts in CBOT soybeans increased to 65,930 contracts (+29,619), the most bearish since December 2024. This concentration of shorts has increased price resilience to unexpected positive news (such as weather, logistics, or policy news), potentially intensifying short-term short-covering. Strategically, wheat is neutral to slightly bearish amidst Russia's upward revision to offset Ukraine's contraction, making it more suitable to invest in medium-term short positions on rallies and use near-month call spreads to hedge short-term squeeze risk. With soybeans holdings at their most bearish, caution is advised against weather- or policy-driven surges. Consider selling the deferred month and buying the near-month to capitalize on term structure recovery, or employing inverse necklines to reduce holding costs. Risks lie in Black Sea shipping, inspection regulations, export rhythms, and reserve rotations and tenders by major importing countries. Maintaining diversified hedging and dynamic delta management is recommended.
This week's focus and conclusion
In the energy sector, declining sanctions premiums and weakening refined product cracks continue to weigh on crude oil prices. Focus on marginal signals from Friday's Trump-Putin meeting and the evolution of the Brent term structure. Regarding metals, the New York-London gold basis may remain volatile pending policy clarification. Trade with discipline and a light position, centered around a "basis reversion." In agricultural products, the combination of sluggish Ukrainian exports and upward revisions to Russian wheat prices, coupled with concentrated short positions, is increasing volatility. Focus on structured and event-driven strategies, strengthening risk control and stop-loss mechanisms.
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
