At 76.09 cents per pound, ICE cotton futures hit a two-week low on June 25. Hours later, the December contract rebounded to settle at 76.97 cents, up 0.93%. The reversal was not driven by a fundamental shift, but by a short-term confluence of a weaker dollar, bargain buying, and renewed geopolitical risks.
Dollar Weakness and Fund Positioning
The U.S. dollar index ended a three-day winning streak after softer-than-expected inflation data dampened expectations for a Fed rate hike this year. A weaker dollar makes dollar-denominated cotton cheaper for overseas buyers, providing initial support to the market.
More direct pressure came from speculative funds. StoneX senior vice president Bailey McHenry noted that the sharp selloff the previous day triggered oversold signals, prompting short-covering. Buyers clustered around the 76-cent level, forming a short-term price anchor. This pattern of sharp drops followed by rebounds has repeated in recent weeks, indicating a lack of directional conviction and a market driven by tactical positioning.
Oil Price Linkage and Substitution Logic
Rising oil prices added to the bounce. On June 25, crude oil gained over 2% after a cargo vessel was hit by an unknown projectile near Oman, prompting the International Maritime Organization to suspend evacuations of stranded ships in the Strait of Hormuz. Concerns over Middle East supply disruptions resurfaced.
The oil-cotton link operates through polyester. When oil rises, polyester feedstock costs increase, narrowing its price advantage over cotton. Some textile mills may shift toward cotton procurement. This substitution effect is particularly relevant as China's polyester output now accounts for over 70% of global capacity—oil price swings have an outsized marginal impact on cotton demand.
Export Data Exposes Demand Weakness
Despite the green close, fundamentals remain soft. The USDA's weekly export sales report for the week ending June 18 showed net sales of current-crop upland cotton at 83,864 bales, down 53% from the prior week and 61% below the four-week average. New-crop net sales were just 67,089 bales. Shipments rose 20% week-on-week, but those to China were only 12,248 bales, signaling a slowdown in Chinese buying.
The weak export data suggests overseas mills remain cautious at current price levels. Southeast Asian spinners are gradually raising utilization rates but restocking on a hand-to-mouth basis. China's import quota allocation pace also constrains U.S. cotton demand.
Industry Impact and Outlook
In the near term, ICE cotton is likely to trade in a 75-80 cents/lb range. The lower end is supported by dollar softness and bargain buying, while the upper end is capped by weak exports and high global ending stocks. For Chinese textile mills, fluctuations in foreign cotton prices directly affect imported yarn costs and ripple through to fabric pricing.
A key risk is that if Middle East tensions escalate further, sustained high oil prices could amplify the polyester substitution effect, ultimately weighing on medium-term cotton demand. The polyester-cotton price spread is already near historical lows; a rapid rise in polyester prices would restore cotton's cost competitiveness.