Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Natural Gas Is Getting Crushed While Cotton Surges
Transcript
- Lucas: So we're about three months into what I'm starting to call the great commodity divergence of 2026. And the most extreme example this week might be cotton versus natural gas. Luna: Cotton is up over 80 cents, and natural gas is down near $3. That's a pretty wide gap for two markets that don't normally move in lockstep anyway. Lucas: Right, they're completely different drivers. But the sheer magnitude of the move is worth unpacking. Cotton futures settled at $80.32 today, up more than 8 percent in just the last five trading days. That's a massive rally for a market that was flirting with 70 cents back in June. Luna: And natural gas at $3.01—down over 7 percent in the same period. It feels like traders are pricing in two different economic scenarios. Lucas: Exactly. Cotton is basically screaming that global demand is alive and well, at least in certain corners. But natural gas is telling you that supply is overwhelming demand and maybe the economy isn't so hot. Let's start with cotton because the move there is really the more surprising one. Luna: I think so too. I mean, cotton is a cyclical commodity tied to consumer spending—clothing, textiles, that sort of thing. A rally like this suggests the global consumer is still spending. Lucas: Yeah. And there's a specific catalyst here. We've had weather issues in key growing regions—Texas, parts of West Africa—that have damaged crop prospects. The USDA just lowered its yield estimates in the July WASDE report, and that lit a fire under speculators. Luna: So it's partly a supply shock, but demand is holding up too. Asian mills, especially in Bangladesh and Vietnam, have been aggressively buying. The price break above 80 cents was a technical trigger for a lot of momentum funds. Lucas: And that technical breakout is self-reinforcing. Once cotton cleared 80, a lot of short sellers got squeezed. Open interest in cotton futures has jumped by about 15 percent over the past two weeks. The positioning data from the CFTC shows that money managers have flipped from net short to net long pretty aggressively. Luna: Now contrast that with natural gas. We've had the opposite situation—record production, particularly from the Permian Basin and the Marcellus Shale. And demand has been tepid because the summer hasn't been that hot in most of the country. Lucas: Yeah, the weather has been a huge factor. Cooling degree days are below normal so far in July, which means less demand for gas-fired power generation. At the same time, storage injections have been running above the five-year average. The EIA reported a build of 65 billion cubic feet last week, which was bigger than expected. Luna: So you've got a market that's fundamentally oversupplied, no weather catalyst, and on top of that, the broader macro narrative of 'the economy is slowing, maybe we get rate cuts' is actually bearish for gas because it implies lower industrial demand. Lucas: But here's the thing—the rate cut narrative is actually bullish for cotton, or at least it's been interpreted that way. Lower rates weaken the dollar, which makes dollar-denominated commodities cheaper for foreign buyers. And cotton is heavily export-dependent. About 60 percent of US cotton production is shipped overseas. Luna: So same macro catalyst—expected rate cuts—hits two commodities completely differently because of their underlying supply-demand profiles and their sensitivity to the dollar. Lucas: Exactly. And I think this divergence tells you something about where we are in the cycle. Cotton is an early-cycle commodity. It rallies when the economy is bottoming and starting to recover. Natural gas is more of a late-cycle play, it tends to peak when industrial activity is at its hottest. So maybe the market is pricing in a soft landing, but not a boom. Luna: That's a good way to frame it. Though I would caution that a lot of the cotton move is just weather and positioning. If the weather normalizes, we could see a sharp reversal. The fundamentals aren't that tight on a global basis—global stocks to use is still around 75 percent, which is comfortable. Lucas: True. But the market is focused on the marginal barrel, or in this case, the marginal bale. And right now that marginal bale is coming from a stressed supply region. Meanwhile, for natural gas, the marginal molecule is coming from a Permian well that's economic at $2.50 or lower. That tells you the floor for gas might be lower than people think. Luna: We've seen this movie before though. Gas can stay low for a while, but eventually either demand picks up or supply adjusts. We're already seeing some producers announce curtailments. EQT and Chesapeake have both talked about shutting in wells if prices stay below $3. Lucas: Right. And that's the kind of supply response that eventually puts a floor under prices. But for now, the momentum is clearly bearish. The energy sector overall has actually been pretty resilient—XLE is up 3 percent this week, led by the oil stocks. But gas-weighted producers are getting crushed. Luna: So if you're a trader looking at this, the question is whether to fade the cotton rally or buy the gas dip. Neither is an obvious trade, but the risk-reward in gas might be more compelling if you think the selloff is overdone. Lucas: Yeah, I think the cotton rally has more room to run in the near term because the technicals are so strong. But it's also more vulnerable to a headline shock—like a rain event in Texas. Gas is probably closer to a bottom, but it could grind lower for a few more weeks before the storage picture starts to tighten. Luna: And that's the kind of analysis that makes people want to follow these markets more closely. Speaking of which—if you've been enjoying these deep dives into the commodity space, and you've found that walking through the economy with us has made something click, there's a simple way to support the show. Lucas: Yeah, it's buy me a coffee dot com slash fexingo. A couple of dollars a month is genuinely what keeps these going—no ads, no sponsors, just listener support. It makes a real difference. Luna: Absolutely. And we really appreciate everyone who chips in. It lets us keep the show independent and focused on the stuff that matters. Lucas: So back to the divergence—one thing I'd flag is that the recent gold selloff, which was its worst quarter since 2013, might be related. Gold is a hedge against uncertainty, and if the market is becoming more convinced of a soft landing, gold loses some of its luster. That could be feeding into a rotation toward industrial commodities like cotton. Luna: Interesting. So you're saying the same macro thesis—rates are going to come down, economy won't crash—is boosting cotton and crushing gold? But gold is supposed to benefit from lower rates too. Lucas: It does, but only if lower rates are accompanied by inflation fears. Right now, the breakeven inflation rate is flat around 2.25 percent. The market doesn't see inflation as a problem anymore. So gold doesn't have that tailwind. Cotton, on the other hand, benefits from lower rates via the weaker dollar and higher consumer spending. Luna: That's a pretty coherent narrative. But let's not get too macro—the specific supply issues in cotton are the real story. Without those weather problems, cotton would probably be flat. The macro is just amplifying the move. Lucas: Fair. And on gas, the macro is also amplifying the downside. If we had a heat wave next week, you'd see gas bounce sharply. So this divergence is fragile. It's not a structural shift, it's a snapshot of where we are on July 9, 2026. Luna: Which is exactly why it's interesting. It tells you about the current state of expectations. The market thinks cotton is scarce and gas is abundant. And for now, it's right. Lucas: And the question is how long that lasts. If we get a hotter than expected summer in August, gas could reverse. If the weather in Texas turns wet, cotton could drop 5 cents in a week. So the trade here is really about weather forecasting and positioning, not long-term fundamentals. Luna: For listeners who want to follow these moves, what should they watch? The key reports? Lucas: For cotton, the weekly export sales data from the USDA is crucial. If we see another week of strong demand from China and Southeast Asia, the rally has legs. For gas, the EIA storage report every Thursday is the big one. A smaller than expected build would be the first sign that supply is tightening. Luna: And of course, the weather forecasts. The 8-14 day outlook from NOAA can move these markets instantly. Lucas: Right. So bottom line: cotton and gas are telling two different stories, but both are driven by temporary factors. The divergence might be a trading opportunity, but it's not a signal to change your long-term portfolio allocation. Luna: Unless you're a commodity trader. Then it's exactly the kind of move you live for. Lucas: True. And we'll keep an eye on it and report back next week. That's it for this episode of The Commodities Economy with Fexingo.