In a repeat of May’s dramatic events, the New York copper market is once again squeezing short sellers. Spot copper prices, which reflect immediate delivery, are trading at a significant premium over futures contracts for later dates. This situation, known as backwardation, typically indicates a tightening supply of readily available copper and is putting pressure on market participants who bet on falling prices.
Short Sellers Scramble as Deliverable Metal Dwindles
The July delivery contract for copper on the Comex exchange is currently trading at a 7.4 cent-per-pound premium compared to September contracts. This significant difference follows an unprecedented backwardation of 29.25 cents in May, which caused heavy losses for short sellers who were caught in a sudden price surge.
While the global copper market boasts comfortable supply levels overall, stockpiles in Comex warehouses have plunged to a 15-year low. This wrinkle has complicated matters for short sellers. To settle their contracts, they need to deliver specific types of copper accepted by the exchange. However, the dwindling stockpiles in these warehouses are making it difficult to find the necessary metal.
The limited availability of deliverable copper creates a precarious situation for short sellers. If they cannot locate the specific type of metal required, they may be forced to buy back their short positions at a premium in the open market. This buying spree to cover their positions would further drive up prices, potentially creating a vicious cycle. With less than six weeks until the July contract expires, the return of backwardation suggests many short sellers remain exposed and vulnerable.
Bullish Investors and the Squeeze’s Lingering Effects
The May squeeze was fueled partly by a surge in investment from bullish fund managers who believed copper prices would rise. This optimism pushed New York copper prices to record highs. While London and Shanghai copper prices mirrored this upward trend, they have retreated in recent weeks as some investors cashed in profits and concerns regarding near-term demand for the metal materialized.
The current backwardation presents a difficult choice for short sellers. Exiting the market by buying back their short positions would result in losses due to the price premium. However, if they cannot find the physical metal for delivery, they risk even steeper losses if prices continue to climb.
The squeeze highlights the power dynamics within the copper market. Long position holders, who bet on rising prices, are in a strong position to capitalize on the short sellers’ predicament. They can potentially hold onto their contracts and watch the price rise as short sellers scramble to cover their positions.
Looking Ahead: Potential Market Repercussions
The ongoing squeeze in the New York copper market has the potential to reverberate through various sectors. Tightening supply and rising prices could lead to higher production costs for manufacturers who rely on copper. This, in turn, could be passed on to consumers in the form of increased prices for finished goods.
Market analysts are closely monitoring the situation to see if the squeeze eases before the July contract expires. If it doesn’t, the impact could be felt not just in the copper market but also in broader industrial sectors that rely on the metal.
The developments in the New York copper market serve as a reminder of the complex interplay between supply, demand, and investor sentiment that can cause sudden price movements and create challenges for market participants.
Source: Mining.com
