Oil prices skyrocketing and production cuts expected to resonate, hedge funds revive bullish bets on cotton after two years.

Due to the impact of the conflict in Iran pushing oil prices higher, the attractiveness of natural fibers relative to the increasingly expensive synthetic fibers is gradually increasing, and asset management agencies have turned to a net bullish position on cotton. Data released by the U.S. Commodity Futures Trading Commission on Friday showed that as of the week ending April 14, long positions in New York cotton futures outnumbered short positions by 16,825 contracts. This has reversed the net short position pattern that has been in place since April 2024. Bin Hui Ong, a commodities analyst at BMI under Fitch Solutions, stated that the U.S.-Iran conflict has pushed up energy prices, thereby increasing the cost of petroleum-based synthetic fibers such as polyester and nylon. This change has significantly boosted the competitiveness of cotton, with main cotton futures rising for six consecutive weeks. The high dependence of Asian textile factories on petrochemical raw materials from the Gulf region may prompt textile companies to adjust their blend ratios and increase their cotton usage. Supply-side risks are also helping to boost cotton prices: the conflict has driven up fertilizer prices, which may inhibit planting intentions for the next cotton season and lead to reduced production. Analysts at Cotlook predicted in March that there will be a supply gap of around 295,000 metric tons in the global cotton market for the 2026/27 season; the ongoing drought in the main cotton-producing regions of the U.S. also adds uncertainty to the country's production. Since the outbreak of the conflict, cotton futures have risen by about 22%, approaching a two-year high. Ong believes that even if oil prices fall back, the upward momentum in cotton prices is likely to continue. "Even if the supportive factors related to oil prices diminish, we expect cotton prices to still receive strong support, as the optimistic expectations for supply that suppressed prices during 2025 are continuing to fade," she noted, however, that ample buffer stocks may limit the upside for cotton prices. CFTC data shows that the newly added net long positions are at the most bullish level in about two years, with non-commercial long positions rising to 56,736 contracts and short positions falling to a 23-month low.