Cotton futures logged another 12-month high Monday, leaving them overbought on the charts. But the fiber’s longstanding trading relationship with crude oil signals that there may be more upside left.
The relative strength index (RSI) reached 83.07 in May cotton as of Monday’s close, the highest for any nearby cotton contract since February 15, 2024. RSI measures the average gains and losses over the last 14 trading days and places them on a scale from 0 to 100. Values over 70 are generally regarded by traders as “overbought” territory, with those under 30 “oversold”. With May cotton trading firmly in overbought territory, standalone technical analysis would indicate cotton is much more susceptible to profit-taking pressure than usual.
However there is at least one other indicator that is working against the notion of cotton suffering a sudden retreat: its historical relationship with oil futures. Over the last 20 years, the ratio of nearby cotton futures to West Texas Intermediate oil futures averages 1.11 at the weekly close. That ratio currently sits at .76, a full standard deviation below the average. The relationship weakens to a degree when oil prices rise above $100 a barrel but still holds overall, with the ratio averaging .91 during those weeks. This indicates cotton may still be underpriced even during the current bout of abnormally high oil prices.
Cotton is impacted by oil markets in similar ways compared to other row crops in the U.S., relying on diesel and numerous petrochemicals to grow a successful crop. But cotton also has a unique relationship with its largest substitute fiber, polyester. Polyester is derived as a byproduct of crude oil production. With the flow of oil and gas severely disrupted, especially to the textile-heavy countries in Southeast Asia, polyester prices are likely to rise in the near future which should in turn increase the demand and price for cotton.
Early signs of this appear to be emerging, with Cotton Inc. noting an 8 cent per pound increase in India over the last month and a 2 cent increase in China. USDA also increased its domestic mill use forecast in both countries by 500,000 bales in the most recent WASDE. Like any market during a rally, healthy pullbacks are possible, but if oil prices remain anywhere near current levels for an extended period, the case for cotton futures to move higher is alive and well.