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Cotton futures in short term sideways trading area
Jul '08
Commodity continued its sell off Tuesday among experts' pessimism on the second quarter economic rebound. Crude oil price tumbled more than $5 during the session and settled below the critical $130 per barrel area. NY cotton traded in a range of merely 163 points. The day's high was established at 73.14 just before the options pit open.

An hour later, good volume selling on the screen pushed the December contract temporarily below 72 cents. Another sell momentum came in on cotton options pit close and the close was settled at 71.56 basis Z'08, near low of the day.

Spec hedge position is now in a negative area at 0.2% net short. The last time we saw a net spec short position was back in May 2007. From this point, there's potential for the specs to go either direction. As tropical storm Dolly draws closer to making landfall, the market is eager to know what possible damages the storm could bring to the crops.

Although it is more unlikely for the storm to threaten oil supply, the combination of rain and wind brought by the storm will likely do damages to the 130,000 acres of cotton crop in the Grande Rio Valley area, the expected landfall location of the storm. We're expecting 4-6” rain in most areas with up to 15” in certain locations. This area has already received plenty of rain in recent weeks.

The commodity index started its rally since beginning of June and topped out a month later. Cotton, at the moment and after having lost nearly 10 cents since end of June, seems to have found a comfortable short term sideways trading area. Influenced by stronger dollar and softer overall commodities market today, Z'08 low made it to the bottom of the range.

The possible damage caused by Dolly might not affect the market price in a big way since we're talking about a moderate size of acres. Due to uncertainties in the market, this short sideways trading pattern is likely to hold for the nearby sessions to come.

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