ICE Cotton Continues to Retreat: Profit-Taking and Oil Pressure, with El Niño as a Key Variable

On July 9, ICE cotton futures for December settled at 80.63 cents per pound, a marginal decline of 0.05%. While the move appears modest, this marks the second consecutive session of losses, fully erasing the 3.8% rally seen earlier in the week. Market sentiment is shifting from unidirectional bullishness back to rationality—profit-taking is the immediate trigger, but the more fundamental pressure comes from falling oil prices, which lower the cost of polyester, a key substitute for cotton.

Why strong export data failed to support prices The USDA’s weekly export sales report for the week ending July 2 showed net sales of 66,400 bales for the current marketing year, up 36% week-on-week, and forward sales of 86,971 bales for the next season. Shipments totaled 230,056 bales, up 5% from the prior week. On the surface, demand remains solid, with Chinese buyers maintaining net purchases of over 3,000 bales. Yet the market did not react positively. The reason: export data is a lagging indicator, while speculative capital focuses on expectations. The rally earlier this week had already priced in the export improvement. Without a new bullish catalyst, profit-taking was inevitable. StoneX analyst Bailey McHenry noted that the 40-day moving average (around 79 cents/lb) provided technical support, with prices bouncing off that level, indicating buying interest remains but upside momentum is lacking.

The hidden oil-cotton linkage: polyester substitution pressure returns Another variable that cannot be ignored is crude oil. On July 9, oil prices fell about 2%, as concerns over the Middle East eased and inflation plus recession fears weighed on demand. The most direct industrial transmission of lower oil prices is reduced production costs for polyester, cotton’s main synthetic substitute. For textile mills, the price spread between chemical fiber and cotton is a key parameter in procurement decisions. When oil falls and polyester prices loosen, mills tend to increase their use of synthetics and reduce cotton ratios. This substitution effect is especially sensitive when cotton itself is trading at a high of 80 cents/lb. While ICE cotton has not crashed, sustained oil weakness would significantly cap any upside in cotton prices.

El Niño: the most underestimated supply variable for H2 The U.S. Climate Prediction Center’s latest report indicates El Niño will strengthen by year-end and persist into early spring 2027, with a 97% probability. For the cotton market, this could be the most important weather event of the second half. El Niño typically brings more precipitation to key U.S. growing regions like Texas. In recent years, persistent drought in Texas has kept abandonment rates high and yields low. If rainfall returns, abandonment could fall and yields rise, implying an upward revision to 2026/27 U.S. cotton production. However, weather-driven supply improvement is not necessarily bearish for prices. El Niño could also bring drought or excessive rain to South Asian cotton regions like India and Pakistan, increasing global supply uncertainty. The market has not fully priced this in. Once the USDA monthly supply-demand report (due July 10 at midnight Beijing time) confirms weather risks, cotton futures could see a new wave of volatility.

Practical recommendations ### For buyers - The current 80 cents/lb level can be seen as a short-term support zone, but do not chase prices higher. Wait for the USDA report to determine direction. If the report is bearish, consider locking in prices in the 78-79 cents/lb range. - Monitor crude oil and polyester chip prices. If WTI crude breaks below $70/barrel, polyester substitution pressure will intensify, further weighing on cotton. In that case, buyers may delay price fixing.

For exporters - For short-term export orders, use a “price fixing plus floating premium” mechanism to lock costs and avoid margin erosion from cotton futures volatility. The 40-day moving average can serve as a short-term safety line for fixing. - El Niño’s impact on U.S. cotton production has a 3-6 month lag. When signing forward contracts (delivery after January 2027), include weather risk clauses or hedge against potential price spikes by purchasing call options.