Are investment funds buying the rebound in carbon?
“If everyone is thinking the same thing, someone is not thinking.” - General George Patton, U.S. Army
Futures markets are not simply full of speculators trying to anticipate what other speculators are going to do, although it might feel like that sometimes. Commodity futures markets involve a vast array of different participants, each with very different means and motivations.
Positioning analysis allows a carbon trader or longer term investor to understand how market participants behave under different circumstances in the market - fundamental, technical and sentiment. If you can predict behaviour, and be able to correctly anticipate the risk that capital flows will move one way or another, then you have an edge over other traders in the market.
Positioning data is probably the most underutilised tool in commodity markets. It breaks down open interest (the number of open contracts) during a particular period, split between different types of market participants, and according to whether they were long or short. Remember that futures markets are zero-sum - for every buyer of a particular commodity futures contract (a ‘long’ position), there must be a seller on the other side (a ‘short’ position).
In this article I introduce carbon market positioning data and show how investment funds are approaching the carbon market.
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