A Disorderly Liquidation
Commodity futures contracts follow a predictable lifespan.
The size of the open interest is an indicator of where the contract is in its’ lifespan.
Starting at zero, the open interest will experience steady growth until it peaks when it becomes the nearby or front month contract.
Approximately a month prior to the first delivery day, participants will begin to liquidate their positions.
The July canola $RS_F ( 0.0% ) is at the point of its’ lifespan when open interest is expected to decline.
While the open interest has declined to 147k (peaked at 175k), the market is faced with the prospect of liquidating a relatively large open interest over the next 20 trading days and a potentially disorderly liquidation.
Chart 1; July’26/Nov’26 Canola Spread
Chart 1 represents the history of the July’26/Nov’26 canola spread.
Given that a large percentage of the open interest of the July will be rolled into the Nov and time is becoming a factor, there are indications that the liquidation could become disorderly and manifested in volatility of the spread.
July 2026 / Nov 2026 Canola Spread
The July/Nov spread represents a classic example of institutional influences interacting with market forces.
The open interest represents approximately 3m tonnes, an amount that makes it impractical for the long to take delivery given institutional regulations outlined in the contract specifications.
From the perspective of market forces, the 3m tonne figure represents an amount that the short is unable to deliver against given current ending stock figures.
Given recent price action combined with changes to open interest, it appears that the spread will gravitate towards even money or a backwardation orientation for the short to reduce exposure.
Assuming that the spread moves towards backwardation, it may affect the technical analysis of the November contract, that is, the strength in the spread will result in weakness in the November contract.
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Brent
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Nothing written, expressed, or implied here should be considered investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your own due diligence.