Prices soar to resistance at 7-month highs in thin trade

* Speculators boost bullish bet in cotton to August highs -CFTC

* July contract premium hits highest since June 2011

By Chris Prentice

NEW YORK, March 21 (Reuters) - Cotton futures rallied on Friday and marked a third straight weekly gain, fueled by worries over tightening nearby supplies in the United States, the world's top exporter.

The front-month May cotton contract on ICE Futures U.S. rallied 1.13 cents, or 1.2 percent, to settle at 93.31 cents a lb, and post a third straight up week.

Prices soared as high as 93.60 cents a lb, meeting resistance as they neared last week's seven-month high of 93.75 cents a lb.

"There's an absence of trade selling to keep us from making these (big) moves in the light volumes," said Sharon Johnson, a cotton specialist with KCG Futures in Atlanta.

Further, traders positioned themselves ahead of a U.S. government report due on Monday expected to show that U.S. farmers have harvest and processed fewer than the 13.2 million 480-lb bales forecast by the U.S. Agriculture Department (USDA) for the 13/14 season.

That could translate to tighter inventories by the end of July than the three-year low of 2.8 million bales projected by the USDA earlier this month.

A weekly U.S. government report on Thursday showed that cotton buyers have an "on-call" position of over 46,000 lots remaining against May and July contracts.

That number represents bales that have been booked but not priced.

It was the highest on-call position for comparable reporting periods since March 2011, when prices hit historic highs above $2 a lb, according to government data compiled by Reuters.

Further, the huge discount of prices for the 14/15 crop, represented by December contract futures, means buyers cannot roll positions forward after the July expiry without paying steep warehousing costs.

The December ICE cotton contract rose 0.27 cent, or 0.3 percent, to finish at 80.25 cents a lb.

The left the premium of the second-month July contract above December at 13.06 cents a lb, up from 11.79 previously and at its highest since June 2011, according to exchange data compiled by Reuters.

A backwardated market, in which nearby contracts trade at a premium, is often taken as indication of tight nearby supplies.

Further, speculators been boosting a bullish bet in cotton raising it in the most recent reporting week to the highest since August, the last time prices soared above 93 cents a lb.

The combination of on-call buying and renewed speculator interest may keep prices pinned to these highs levels, crimping mill demand, dealers said.

Even so, bears point to an overhang of world stocks expected to hit a record by the end of July after back-to-back years of surplus.

World inventories have ballooned, particularly in top consumer China after Beijing began a stockpiling program in 2011. Furthermore, the high prices and wild market gyrations of 2011 drove mills to lower-priced, synthetic alternatives. (Editing by Grant McCool )