Arbitrage Space Narrows, When Will COMEX Copper Short Squeeze Sentiment Dissipate? [SMM Analysis]

Last Tuesday (May 14), the COMEX July copper contract experienced a short squeeze, with open interest reaching 177,000 lots. The price surged sharply, peaking at $519.9/lb, nearly hitting a three-year high, and the near-month COMEX contracts shifted to a backwardation structure.

On May 14, COMEX copper inventory fell below 20,000 tons, and the proportion of long positions in COMEX continued to rise. The near-month COMEX copper contract strengthened and shifted to a backwardation structure, leading to a short squeeze risk and pushing COMEX copper prices upward. Meanwhile, the price spread between COMEX and LME copper surged to a historical high, reaching nearly $1,000/mt on the evening of May 15. Historically, the COMEX and LME 0-3 price spread has not exceeded 5%, and since 2009, it has mostly stayed below 2%. On May 15, 2024, the price spread exceeded 10% at its peak, stimulating a large number of speculative arbitrage positions to enter the market.

The main reasons for the squeeze include: ① Sanctions on Russian metals, reducing the available deliverable supply; ② A decrease in the Panama Canal's capacity after Q4 2023, reducing copper cathode shipments from South America to North America, and a significant drop in Chilean production in Q1 2024. This has led to low inventory levels in LME and COMEX warehouses in New Orleans. Prior speculative reverse arbitrage positions placed a large number of short positions on COMEX. Holders of COMEX short positions actively sought copper cathode for delivery to COMEX warehouses, but were limited by brand requirements and shipping space, making it difficult to gather large quantities of copper cathode in the short term. Some short position holders were forced to roll over or cut their positions, causing the near-month COMEX contract to shift to a backwardation structure. According to SMM, previously, large players actively purchased imported brand warrants in the Chinese mainland market, slightly increasing the Yangshan copper warrant premium.

Currently, the LME 0-3 and COMEX price spread has somewhat retreated, closing at around $300/mt as of May 20, still higher than the European comprehensive transportation cost of $150, but lower than the Asian comprehensive transportation cost of $350. The timing of the dissipation of the short squeeze depends on several factors. COMEX warehouses have strict sanctions on Russian copper, and other brands meeting delivery requirements are also limited, making it uncertain whether copper cathode supply can meet delivery needs. Shipping schedules in some regions are tight, and space is limited. For example, the earliest shipping schedule in China is mid-June, with the earliest arrival at COMEX expected in early July. Overall, the risk of a COMEX copper short squeeze remains, with bullish sentiment showing no signs of cooling. Attention should be paid to when copper cathode can arrive at COMEX warehouses, at which point the squeeze sentiment will ease.