In recent weeks, the copper market has experienced unprecedented activity, with copper futures in New York rallying to record highs. This surge, driven by a short squeeze, has caused a stir in commodities trading, prompting traders to divert metal to U.S. shores. 

A short squeeze happens when traders who have bet against a particular asset – here, copper futures – are forced to buy back the asset as prices rise. This buying pressure pushes prices even higher, creating a cycle that further drives up the cost.

The current short squeeze in the copper market is due to several factors. First, there is a high demand for copper, driven by industrial needs and infrastructure projects. This demand has tightened the market, putting pressure on available supplies.

Secondly, the dynamics of the futures market have played a crucial role. The most active July contract on the Commodity Exchange Inc. (or Comex exchange) has seen a sharp price increase, creating a record premium over contracts for later months.

Let’s highlight that the Comex exchange is one of the world’s major metals trading platforms, and its July contract’s price increase means that copper for immediate delivery is significantly more expensive than copper for future delivery. This situation puts short position traders in a difficult spot as they are forced to either meet rising margin calls (additional funds required to keep their positions open) or deliver physical copper, which is in short supply. Consequently, they have to buy back copper futures, driving prices even higher.

Such an event has a global impact, for instance, traders in China are scrambling to arrange shipments of copper to Comex warehouses in the U.S. to fulfill delivery obligations. This is essentially because traders are facing challenges in finding enough metal to meet their commitments as there are limited supplies in both Chinese bonded warehouses and Europe.

And the rush to move metal across the globe highlights the interconnected nature of the global copper market, as the supply and demand dynamics in one region can significantly affect prices and availability in another.

Moreover, although the record-high prices seen in the copper futures market have also led to significant arbitrage opportunities, in which traders engaged in reverse arbitrage trades, the rise in prices on the July contract has also “squeeze” them.With the goal of profiting from the differences in prices between two markets, some traders use a strategy called reverse arbitrage which involves selling copper futures on one market, like the Comex exchange, while buying them on another market, such as the Shanghai exchange. However, as prices on the July contract surged, traders involved in these reverse arbitrage trades found themselves squeezed, facing losses instead of profits. 

Now, the question is how long this short squeeze will continue for? 

Experts suggest that traders who have long positions – those who bet on prices rising, might extend their positions to take advantage of the current market conditions. These conditions are known as backwardation, which in essence means that prices for immediate delivery are higher than for future delivery. It is essentially the opposite of contango, which is when the future price is higher than the current price. Thus, long position traders may choose to “roll forward” their positions, in order to lock in the current higher price for delivery in the future. 

However, the exact duration of the squeeze is really uncertain and it will depend on factors such as how the ongoing demand and supply constraints unfold, as well as the reaction from all types of market participants.

To conclude, the record-high rally in copper futures driven by a short squeeze has  for sure attracted significant attention from traders and market observers, and as traders navigate this volatile period, the lessons learned will undoubtedly influence future trading strategies and market dynamics