NY futures rebounded this week, as December gained 261 points to close at 68.98 cents.
December closed today at its highest level in 22 sessions, rallying nearly three cents from last Friday’s intra-day low of 66.28 cents. However, while this week’s performance looks promising on the chart, it lacks conviction since daily turnover stayed within a modest 11,166 to 20,055 contracts range over the last five sessions.
The same goes for open interest, which actually decreased by 500 contracts in December since last Thursday and currently amounts to around 16.24 million bales. This suggests that this bounce was mainly caused by a lack of additional spec selling and some light short covering rather than a wave of new buying. In a strong up move we need to see expanding volume and open interest!
Speculators continued to reduce their net long position during the week of July 5-11 and were just 1.79 million bales net long. However, this position is comprised of 7.10 million bales in outright spec longs and 5.31 million bales in outright spec shorts. In other words, the spec camp is now a lot more divided than it was back in February, when there were 14.87 million bales in outright longs and just 2.50 million bales in outright shorts.
We see a similar division in the trade position, where 58 futures accounts hold outright longs of 5.95 million bales and another 58 accounts are 15.09 million bales net short, resulting in a net short position of 9.14 million bales. A large portion of these trade positions is held against unfixed on-call sales and purchases.
As of last Friday there were a total of 10.05 million in unfixed on-call sales, of which over 6 million bales were on December and March. Unfixed on-call purchases amounted to 3.60 million bales, of which 2.29 million bales were on December. These unfixed positions provide decent support and resistance and make it more difficult for the market to break out of its current trading range, as mill fixations will increase in the mid-60s, while growers will become active once December moves above 70 cents.
US export sales for the week that ended on July 13 amounted to 201,400 running bales of Upland and Pima cotton, which brings commitments for the current season to 15.7 million statistical bales, while there are so far 5.05 million statistical bales on the books for the 2017/18-season. Shipments increased to 283,200 running bales last week, bringing total exports for the season to just over 14.1 million statistical bales, with 2.6 weeks to go in the marketing year.
This means that we will likely see a final number of 14.7-14.8 million bales at the end of this month, which would be the second highest on record after the 2005/06-season, when 17.67 million bales were exported. The pace of US exports this season has been a surprise, considering that last September the USDA had its estimate still at 11.5 million bales.
The quick disappearance of ROW inventories around the globe to the second lowest level since the 2009/10-season - according to our calculation – means that either beginning stocks were not as plentiful or that mill demand has been stronger, or possibly a combination of the two.
Since most of the growth is happening in the Eastern Hemisphere, where we are seeing a rapidly expanding middle class with increasing purchasing power, it is more difficult to get a good grip on the level of demand. ROW mill use reached a low point in 2011/12, when it fell to just 65.07 million bales in the wake of the historic bull market. Since then ROW mill use has been steadily climbing back and it is currently projected to reach a record 79.03 million bales in the coming season.
Near empty ROW warehouses and record ROW demand are not necessarily a problem if all these big crops materialize as anticipated. The USDA currently estimates ROW production to reach 91.36 million bales, which would be the second highest level after the 2011/12-season, when 93.61 million bales were produced.
Therefore, if nothing goes wrong, both in regards to quantity and quality, then the ROW should have plenty of cotton to not only supply its own demand, but to give away a million tons to China and refill its depleted inventories. But it will be another 3-4 months until we know for sure!
So where do we go from here? Speculators have forced the market lower by selling around 9 million bales net over the last two months and they can’t keep up this kind of selling pressure. While most of this spec selling was long liquidation, there have also been new shorts established, which could provide the fuel for short covering rallies.
The trade has been a net buyer over the last two months and given the depleted inventories and the uncertainty regarding crops, we don’t see merchants or growers as aggressive sellers at this point.
We therefore feel that the market will continue to see support in the mid-60s and we could even see a spike towards resistance at 72 cents on spec short covering. A move higher than that is only in the cards if there are crop problems, otherwise grower selling and fixations will likely put a cap on rallies in the low 70s. For this reason we feel that the market is going to trade in a range between 66-72 cents in the foreseeable future.
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