NY futures drifted lower this week, as July dropped 108 points close at 76.55 cents
The main feature in this rather uneventful week was the orderly liquidation of the July contract, which saw its open interest drop by another 22,645 contracts over the last five sessions. Before today’s session July open interest was at just 6.88 million bales, which compares to a high of 14.19 million bales a little over a month ago, on May 5th.
As pointed out last week the spec longs are now clearly on their way out of July and we believe that neither bullish export sales reports nor a potentially friendly WASDE report will compel them to reenter the long side this late in the game. Some of them may take their chances on a long position in December instead, while other simply call it quits.
This means that the trade is being put in control of July’s fate over the remaining two weeks before First Notice Day. So far the trade has been patiently covering shorts on a scale down basis, absorbing everything the specs were throwing at them, and this is likely to continue over the next few sessions.
The latest CFTC on-call report showed that mills fixed 0.65 million bales last week and that the unfixed balance was down to 2.46 million bales as of last Friday. Considering that there have been additional fixations since then, we estimate this number to be around 2 million bales by now. While there has been great progress made on these remaining fixations, mills will still need to fix about a million bales per week!
In other words, there are still a lot of shorts to cover, not just related to fixations, but also tied to the disposal of remaining basis-long positions. As merchants are trying to get rid of all remaining cotton before the market adjusts to a lower new crop price plateau, they will have to buy back short futures once a sale is made.
US export sales continue to surprise positively considering how little cotton is left for sale, as last week 283,500 running bales of Upland and Pima were sold for both marketing years. Shipments were also quite strong at 324,400 running bales!
Total commitments for the current season are now at over 14.9 million statistical bales, whereof 12.5 million bales have already been exported. Sales for shipment August onwards are at 3.4 million statistical bales so far.
Tomorrow’s WASDE report will likely show another increase in the export number, from 14.5 to around 14.7/14.8 million bales, which would drop US ending stocks to 3.0 million bales or less at the end of July. Other than that we don’t expect any major changes, unless the USDA were to finally adjust the inflated Indian ending stocks number.
There currently exists a rather striking difference between ICAC and USDA statistics. The ICAC has global ending stocks for the current season at 79.8 million bales, which are 9.7 million bales less than the USDA’s 89.5 million bales. For the coming 2017/18 season the ICAC sees a further decline in stocks to 75.4 million bales, whereas the USDA is 11.7 million bales higher at 87.1 million bales. These differences stem primarily from stock numbers in China and India, and we believe that the ICAC is closer to reality!
So where do we go from here? The July liquidation has progressed quite swiftly and orderly so far, but the remaining two weeks might still harbour some surprises. For one we are not seeing the usual liquidity during the ongoing index roll. This means that some of the index position has already been rolled, probably when the July/Dec spread inverted to 13-14 cents a couple of weeks ago.
As liquidity dries up next week, the market could become more volatile again. The relatively large certified stock is giving the shorts a false sense of security. We believe that most of this certified stock is already sold and will therefore not be available for tender. With the US nearly sold out, being short in an increasingly illiquid market is a dangerous position to be in.
Although spec longs will probably continue to exit, there may be some trade longs that could stand firm and insist on taking delivery. With the market near its cash value it is a lot easier to be long going into the notice period than having a short position that cannot possibly be backed up since there is no cotton left! Our advice to all the July shorts is to get out over the next few days while liquidity is still adequate in order to avoid getting caught in a last minute short squeeze!
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