US cotton stabilizes as fears of supply squeeze wane

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* Commercial hedgers sidelined by volatility

* March open interest rising ahead of December expiry

* Caution reigns ahead of U.S. election

NEW YORK, Oct 25 (Reuters) – U.S. cotton futures were flat to slightly higher on Thursday, as the fiber market took a breather from the wild swings of the past week as concerns about a supply squeeze waned.

The most-actively traded December cotton contract on ICE Futures U.S. settled at 72.73 cents per lb, up just 0.08 percent.

The market has swung in an almost 10-cent range over the past week, its longest period of volatility since June and its biggest trading range since August.

The fluctuations have sidelined some commercial hedgers, while investors are cautious about making big bets ahead of the U.S. election on Nov. 6 with President Barack Obama locked in a tight battle against Republican challenger, Mitt Romney.

“We’ve got liquidation in every market. You’ve got an election. The specs are the only ones trading. It’s choppy and I’m not participating,” Bill Collard, who heads up Florida-based commodity brokerage firm the Futures Management Group, said.

Volume in the December contract was just over 11,000 lots, almost half the level seen earlier this week.

With the recent pressure on the front-month contract, the contango returned, ending the backwardation that emerged over a week ago amid fears about nearby tightness in supplies.

Early testing on this year’s crops raised concerns about lower-than-expected quality and triggered last week’s rally to five-month highs.

Prompt demand for December shipment and record-low exchange stocks added to the perception of a squeeze in availability and forced shorts to run for cover. Only U.S. fibers can be delivered to the board.

Certified ICE stocks are just under 8,500 480-lb bales, their lowest since exchange records began in 2002.

This week though, the market has retreated as quickly as prices rallied to close to 80 cents last week, ending the inversion that had materialized last Tuesday as concerns about supplies have waned.

On Thursday, the December and March spread was in contango of 0.24 cent, compared with a backwardation of over 2 cents last week. Traders hope the market will return to full carry with the spread at 2.5 cents, making it economic to store fibers while demand remains lackluster.

Further pressure on December is expected between Nov. 5-9 when index funds roll their positions forward, selling the front-month and buying March.

Open interest in the December contract has fallen ahead of the index roll and the first delivery notice day in November.

The number of outstanding December contracts has dropped about 8 percent to just over 110,000 lots in the past week, while March open interest has jumped 20 percent to just under 70,000 lots as speculative investors have built fresh longs.

Bales pending review by the U.S. Department of Agriculture rose to over 4,000 480-lb bales from around 2,500 bales overnight, although that level is still well below historic averages.    (Reporting by Josephine Mason; Editing by Bob Burgdorfer)

Source: http://af.reuters.com/article/commoditiesNews/idAFL1E8LPIA120121025

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