Source: Jin10 Data
Bank of America analysts warned that the spot market is still tight and those who are shorting copper should be cautious...
The historic squeeze in New York copper futures seems to be coming to an end, with the easing of the key spread relieving pressure on traders. Earlier this month, shorts suffered losses as the price spiraled upward.
CME Group's New York Mercantile Exchange (Comex) copper July delivery contract was slightly discounted on Wednesday compared to September, returning to pre-squeeze levels. This spread surged to a record premium in mid-May, causing huge losses for financial investors and physical copper traders who had expected Comex copper prices to fall relative to other global benchmarks.
Merchants can still profit by closing their short positions for the July contract by shipping metal to the United States, as they did when they searched for one of the few coppers available to be delivered to the New York Mercantile Exchange worldwide, but their efforts were hampered by supply constraints and logistics bottlenecks.
On the other hand, short sellers who cannot make physical delivery are almost at the mercy of counterparties. In recent weeks, investors have flooded into the New York copper market, driving up prices and allowing them to quickly profit by selling their July contracts back to short sellers and buying cheaper forward contracts.
Faced with huge additional margin calls, traders either continue to hold short positions in the hope that prices will fall as long positions begin to unwind or close out their losses ahead of time.
Despite the discounting of the July copper contract price compared to the futures price, the balance has changed and shorts can now extend their positions for the next few months without impact. However, even if the July-September spread narrows, some analysts still believe that as global shortages become a reality, copper prices may rise further in the future.
Michael Widmer, chief analyst at Bank of America, said in a report, "Looking ahead, with the copper market unlikely to be oversupplied anytime soon, we expect more frequent and severe price fluctuations across regions. Further squeezing is possible as the spot market is still tight, so CME may not be out of the woods yet."
As spreads narrowed, copper prices in New York, London and Shanghai all fell. After a period of tight supply, prices in these three markets soared to record levels, but as longs took profits and warnings of softening spot demand intensified, copper prices fell.