* Storm watch offset overall bearish fundamentals
* Upper end of price range seen at 78 cents – analysts
NEW YORK, Aug 27 (Reuters) – Cotton prices were higher on Monday recovering ground lost late last week as tropical storm Isaac headed towards Alabama and Mississippi, two important states in the U.S. cotton belt.
The benchmark December cotton contract on ICE Futures U.S. rose 1.24 percent to settle at 76.14 cents per lb, just off an intraday high of 76.24.
Weather watch turned to the storm in the Gulf of Mexico on Monday after the U.S. National Hurricane Center (NHC) said Isaac is forecast to strengthen into a Category 2 hurricane before it makes landfall somewhere between Florida and Louisiana.
That vast covers some of the United States’ key cotton-producing states, including Mississippi and Alabama.
Fears of damage to crops gave prices a fillip on Monday, even though there are few concerns about a shortage of supply. Texas, the country’s main growing region, will be unscathed by the storm and U.S. output is expected to grow 14 percent to over 17 million bales in the marketing year to July 2012.
In recent weeks, the potential for a devastating drought in India, the world’s No. 2 producer, has occupied the market, with any cuts in output seen helping to eat into record surplus and offset otherwise bearish market conditions.
There is little potential for a break above 78 cents, the upper end of its recent trading range, market participants said.
“There should not be any significant price leaps in the near future,” said Commerzbank analysts, noting falling consumption from China, the world’s largest producer and user of fibers, and weakening demand due to the euro-zone debt crisis and competition with synthetic fibers.
Trading volumes remained low ahead on Monday ahead of the U.S. Labor Day holiday weekend, with just over 9,000 lots changing hands on the day.
That is half the 250-day moving average and well off levels close to 20,000 lots seen early last week when funds and institutional investors made a brief return.
In fact, hedge funds and other speculative investors doubled the size of their net long to 12,333 lots in the week to Aug. 21, the latest Commodity Futures Trade Commission data showed on Friday.
That is their most bullish since February and a dramatic turnaround from a net short just three weeks ago, contrasting with the weak supply-and-demand fundamentals.
Investors have struggled with conflicting signals of late. The global surplus in the textile market is expected to hit record levels, but some funds see opportunities if weak monsoon rains in India curb output and force the government to restrict exports, traders said. (Reporting by Josephine Mason; Editing by Leslie Gevirtz)