Spot copper prices are again trading at a steep premium to later-dated futures in New York, putting fresh pressure on holders of short positions after a historic squeeze last month.
The July-delivery Comex copper traded at a 7.4 cent-per-pound premium to the September contract, in a condition known as backwardation that typically signals a supply shortage. The spread traded in an unprecedented 29.25-cent backwardation last month, putting huge pressure on commodity traders and investors with short positions in the July contract.
The global copper market is comfortably supplied overall, and equivalent spot contracts in Shanghai and London are trading at deep discounts to futures. But inventories in Comex warehouses have fallen to a 15-year low, and last month’s squeeze has forced traders to scramble to find and ship the select brands of copper that can be delivered into the US to settle their exposure.
If they can’t find the material, they may need to buy themselves out of their contracts, and risk driving the July contract to an even higher premium in the process. With less than six weeks to go until the expiry of the contract, the re-emergence of the steep backwardation is a sign that many short-position holders are yet to cover their exposure.
For investors without the means to deliver metal, the backwardation means that they’d face losses buying back their shorts and rolling them forward to later dates. And to get out of the contracts, they’ll be at the mercy of holders of long positions who stand to profit taking the opposite side of the trade.
The short squeeze was fueled partly by a huge surge in investment by bullish fund managers this year, and it helped catapult the New York copper contract to a record high. Prices also vaulted to records in London and Shanghai soon after, but they’ve retreated in recent weeks as some investors have taken profits and worries about the near-term outlook for demand have grown.
July Comex copper was trading up 0.8% at $4.528 a pound as of 9:18 a.m. local time. The London Metal Exchange’s global benchmark copper contract climbed 1% to $9,764 a ton, as all industrial metals advanced.
