ROI-Sky's the limit for investors seeking some copper action: Andy Home

Copper prices remain driven by speculative fervour, with investors drawn to its exposure to energy transition and artificial intelligence megatrends, despite a recent price pullback.

The speculative fever that drove copper prices to ​record highs in January has abated but is still simmering away. Investors, both institutional and retail, continue to be drawn by copper's ​strategic exposure to both energy transition and artificial intelligence megatrends.

Funds are building long positions ‌again ​on the CME's flagship copper contract and retail investors remain highly active on the exchange's smaller products. The threat of U.S. import tariffs on refined copper has lifted the CME price above levels on the London Metal Exchange (LME) and reinforced copper's critical mineral credentials, adding more fuel to the smouldering speculative fire.

Funds are also net long of the LME copper contract, but the true gauge of bulls' great expectations is ‌the LME options market. BEARS GO INTO HIDING

Money managers trimmed CME long positions during the copper price pullback in March but were quick to get back in on the subsequent bounce. Collective net long positioning jumped from a March low of 35,802 contracts to 77,131 at the start of June, the highest level of bull commitment since early 2021.

Net length has since slipped back to 71,127 contracts, but it's noticeable that current shifts in investor positioning are being largely driven by bulls. There are very few bears left in the U.S. copper market.

Fund short positions have been holding at ‌historically low levels below the 20,000-contract mark since the middle of last year. The CME's benchmark copper contract is heavily populated with algorithmic funds, feeding on momentum signals. Unless copper's bull rally goes into reverse, they will stay long. If it extends, they will go longer.

RETAIL SPACE It's ‌not clear who exactly is playing on the CME's micro copper contract, but at a tenth the size of the main contract, it's a product aimed squarely at retail investors.

The January copper price spike coincided with a record surge in micro activity and although some of that froth has been blown off, volumes still registered an 83% year-on-year increase in January through May. Over 3 million metric tons of copper traded in the micro contract in the first five months of the year. Open interest at the end of May was three times higher than a year ago.

CME's copper event options, a binary punt on price, registered record volumes of 145,478 contracts in April. Turnover of ⁠58,594 contracts in ​May was the second highest on record. Copper's investment narrative has seeped into ⁠the public domain and what's going on in the smaller CME contracts suggests the man in the street wants a bit of the action too.

UP, UP AND AWAY? Fund positioning on the LME copper contract has mirrored that across the Atlantic, albeit mutedly.

The net investment long has rebuilt since March but at 34,918 contracts is modest relative ⁠to the second half of last year, when the collective bull bet regularly exceeded 60,000 contracts. While the CME price has twice revisited its January peak, thanks to all the speculation around a looming U.S. tariff decision, the London copper market has been treading water some $800 below its January high of $14,527.50 per ton.

Investors seem wary ​of over-committing to the futures contract, but the options landscape paints a very different picture. Market open interest through the end of this year is heavily skewed to call options conferring the right to buy.

As of Friday, June 12, call option open ⁠interest through December totalled almost 112,000 contracts, compared with just 52,000 contracts for puts, which confer the right to sell. Bullish bets are clustered on the $15,500-per-ton and $17,000-per-ton strikes in September. Market open interest is 17,526 and 16,773 contracts respectively, representing a combined position equivalent to over 850,000 tons of copper.

These are high expectations given the LME three-month price is currently hovering ⁠just ​above the $13,800-per-ton level. But some are even more exuberantly bullish. There is call option open interest at strikes all the way up to $20,000 per ton in December.

One super bull has even bought a strip of call options, sized at 50 lots per month through December, at a strike of $25,000 per ton. MONEY POWER

Copper has been on the investment radar as a proxy for global manufacturing for decades and the power of money to move prices is not new. Analysts at Citi, for example, estimate funds bought around 1.5 million tons of copper in 2020, ⁠easily absorbing a physical surplus of 500,000 tons created by COVID-19 lockdown and driving prices higher.

They are at it again this year, pricing copper on its future structural profile rather than the somewhat messier current reality. The danger, however, is that as ever more investors catch the ⁠copper bug, speculative buying in expectation of ever higher prices becomes a self-fulfilling ⁠prophecy.

Throw enough money at a finite market like copper and the price is going to react one way. Neither supply nor usage is price-elastic enough to offer any short-term fundamental cushion. Maybe that's what the super-bull with the $25,000 call options is betting on.

(The opinions expressed here are those of Andy Home, a columnist for Reuters.) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ‌Follow ROI on LinkedIn, and X. And listen to ‌the Morning Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and ​finance seven days a week. (Writing by Andy Home; Editing by Marguerita Choy)