On August 3, ICE cotton futures settled slightly higher, but spent most of the session under pressure. The December contract rose 0.78 cents, or 0.95%, to close at 82.57 cents per pound. This seemingly contradictory move reflects a tug-of-war between lower polyester costs from plunging oil prices and robust demand signaled by surging export sales.
Market Background
Crude oil markets experienced sharp volatility on the day, with U.S. crude settling down over 5% and Brent briefly falling about 7% to a three-week low. The trigger was easing geopolitical tensions, raising expectations of increased Gulf oil supply. Lower oil prices directly reduce the production cost of polyester, a key cotton substitute, pressuring cotton prices. StoneX risk management consultant Bailey McHenry noted that after a strong rally last week, the market was beginning to correct, and oil's drop of more than 6% added intraday pressure.
On the positioning front, CFTC data showed that in the week ended July 28, speculators trimmed net long positions in ICE cotton by 2,295 lots to 70,542 lots. Despite some profit-taking, McHenry believes funds still hold substantial net longs, and the weekly chart maintains a slight upward trend. This suggests institutional money is not turning bearish, merely reducing exposure at higher levels.
Industry Impact
In contrast to the cautious futures market, physical export data showed surprising resilience. USDA export sales figures for the week ended July 23 indicated new-crop upland cotton net sales of 352,400 bales, more than 20 times the previous week's 16,100 bales. This implies overseas buyers are actively locking in supplies at current price dips, providing medium-term support for cotton prices.
Supply-side concerns also persist. USDA's weekly crop progress report showed the U.S. cotton crop condition rating at 42% good-to-excellent as of August 2, down from 46% a week earlier and well below 55% a year ago. Deteriorating conditions could affect yields and quality, offering potential upside for forward prices. Meanwhile, ICE deliverable cotton stocks fell to 87,606 bales from 90,699 the prior session, indicating limited delivery pressure.
For the supply chain, the oil-cotton price link deserves close attention. As a major substitute, polyester's cost changes directly influence spinners' fiber mix decisions. When oil prices drop sharply, polyester becomes cheaper, potentially shifting some orders away from cotton and capping cotton's upside. However, the explosive growth in U.S. cotton export commitments suggests end-demand has not significantly eroded despite the substitution effect.