I tried to buy an actual barrel of crude oil (2015)(bloomberg.com) |
I tried to buy an actual barrel of crude oil (2015)(bloomberg.com) |
https://www.npr.org/sections/money/2016/08/26/491342091/plan...
They traced the path of their barrel from purchase, to production, to refining, to the sale of the various hydrocarbon products.
It's a great listen.
I'm happy to answer any industry questions in case anyone has any. It is a fascinating job.
Just think about a what a km3 of oil would look like. It is nuts. then realize that we buy and sell in 10,000m3 pipe batches with plenty of liquidity.
But I’m trading physical forward contracts technically and it depends on the specific grade how far forward that is.
The physical oil market trades in monthly cycles. On May 1 I’ll be trading forward contracts for physical oil to inject in June (which will transit for about month and land in July). For a liquid grade like WCS (Canadian heavy) I could technically buy phys “injectors” down the curve a good ways. Monthly, quarterly out about year.
Once a barrel is injected, schedulers manage swaps around physical ops with counterparties to ensure our tanks don’t overflow and we have a nice rateable supply. If a swap won’t cut it at that point, and I’m physically short to refinery demand or longer than I can hold, I can buy or sell distressed inline barrels (already in transit) with lower liquidity.
These aren’t futures though. Futures are standard volumes and typically settled financially. WTI futures for instance are typically not held to delivery, though you can deliver it into Cush if you have tankage. The paper market vastly, vastly exceeds the physical real barrels flowing though, so most of these are simply closed out bets/hedges.
The oil is pumped off of ships or straight off the pipeline into our refinery tankage.
to go from km^2 to m^2 you multiply by 1,000^2.
to go from km^3 to m^3 you multiply by 1,000^3.
So 1km^3 is 1,000,000,000m^3
* https://www.cbc.ca/news/business/oil-negative-price-1.553899...
> Over the span of a few hours one day in April 2020, a guy called Cuddles and eight of his pals from the freewheeling world of London’s commodities markets rode oil’s crash to a $660 million profit. Now regulators are scrutinizing their once-in-a-lifetime trade.
* https://www.youtube.com/watch?v=F7_WXUMFM_w (14m)
* http://archive.is/https://www.bloomberg.com/news/features/20...
Surely there are people trading in these contracts that... don't want their oil delivered to Cushing? The Delivery section makes it sound like maybe it can be delivered somewhere else if the buyer and seller agree, maybe?
And Wikipedia does make it sound like Cushing really can be a bottleneck: https://en.wikipedia.org/wiki/Oil_industry_in_Cushing,_Oklah... But... how? It seems like such a bizarre setup to literally require all the oil to come to this one specific town, I assume I'm missing something obvious?
A big-enough buyer will know how to get oil from Cushing to their facility, often by pipeline. One who doesn't really want oil in Cushing is likely to close out their futures trade before the settlement date, treating it like a purely financial transaction.
> It seems like such a bizarre setup to literally require all the oil to come to this one specific town, I assume I'm missing something obvious?
Futures contracts need to be based on the price of something, but the price of a physical good depends on location. Delivery of a barrel of crude to the South Pole would be much, much more expensive – and more variable – than delivery to a big oil terminal. Contracts for physical goods need some kind of agreed-upon reference point, even if most of the time things get financially settled without delivery.
"F*K HIM!!!!"
Came up again in 2020 (157 comments): https://news.ycombinator.com/item?id=22924929
Somewhat related is the tale of the commodities trade from DailyWTF that was unfortunately executed literally.
Estimations are much easier with metric units.
There are special hand-powered machines for moving chemical drums: https://www.salesbridges.eu/en/products/drums-lifter/
This is why in rare occasions the price of a thing goes negative because trading in that thing you are contractually obligated to take delivery and people trying to unload that obligation sometimes can't find buyers until they are paid to take delivery. It happens when nobody really wants to buy a thing and there is no capacity left to store or ship. When you buy a futures contract and you don't want delivery you have to sell it to close your position, and rarely you have to give people large sums of money so you can close.
Suppose my actual oil futures go from $800k to $900k, the ideal ETF is trying to ensure that $800k also turns into $900k just as if its investors were in actual oil futures. But these aren't futures and don't result in delivery - so critically when real oil futures blow up and that $900k turns into -$1M because the global economy had a heart attack the ETF cannot be worth -$1M as it's just paper and I don't have to pay you one cent.
For the ETFs this means a negative exposure for the operator - they're eating unlimited downside but can't pass that on to their customers, and for a blip like 2020 that's survivable (if you're well capitalised) but longer term it would be fatal.
This, in many ways is a ridiculous sentence which shows what is wrong with the futures market. Futures are contracts for the supply of commodities. All futures should be settled by the actual commodity! That we have got to a situation where the vast majority of futures contracts are just 2nd order bets on the price of thing rather than delivery of the thing is non optimal.
Even oil, which is physically delivered settles physically in discrete locations. It would be pretty funny if someone delivered tankers full of oil to your office though lol.
It's not at all uncommon to trade a tanker load of oil, and this may result in the tanker being re-directed mid-trip, or being anchored somewhere for a while. Those are normal shipping events. (Yes, there are parking spaces for oil tankers. Here are the ones in the San Francisco Bay.[1])
I have read of an oil trader who bought a trainload of railroad tank cars of oil as a similar deal. That was a bigger hassle, because finding and paying for a storage track to park the tank cars became his problem. There is a market in railroad siding for storage, but there are not that many available spaces. Most of them are in Outer Nowhere, someplace where there used to be something that needed track but no longer does.[2] Managing this tied up a lot of high-priced broker time. Supposedly worked out OK, but nobody wanted to do it again.
[1] https://www.sfmx.org/wp-content/uploads/2017/01/Anchorage-9-...
The barrels never had been used for crude oil when I’ve inquired. Sometimes a refined oil product likely used as a raw material for a manufacturing process, but never crude. I think it’s never transported in such small quantities to make sense of using actual barrels. It’s more so a unit of measure, probably with some valid historical context.
My understanding is it’s most likely transported from a well via a pipeline and may need a short trip in a truck or train (tanker style) to get to the pipeline from the well. The well itself usually has a collection reservoir to allow for 24/7 extraction.
I don’t know exactly I’ve just been vaguely around oil industry and engineers my whole life due to where I live.
In small fields they'll typically have larger tanks from the 1,000 to 10,000 gallon size. Wells typically also produce some water and small amounts of nat gas so they'll have some way to either store or burn the gas, and they'll either separate the water on site for disposal, or have a mixed oil/water product that is seperated at a later stage.
If the node isn't on a pipeline a vacuum/pump truck will show up either when the alerting systems hit a particular level, or when a particular interval of time has passed to ensure the equipment is still working.
Modern bulk pump trucks are simply the fastest way to move the product. No one in it for profit is going to move the unrefined product in amounts that small. It's not valuable enough.
Now for some use that may be fine, but that also requires proper cleaning (following environment proection rules etc)
My question was more like a cycle. The metal itself certainly got some value as well.
But if, as you say the largest emission comes from manufacturing the plastic bottle, not the transport of the bottle AND the content; then it seems possible to lower the carbon footprint by switching to glass (on top of the other advantages like reducing landfill use/litterring/environmental pollution).
In some cases there is basically a bucket shop (hopefully not literally, those are illegal) and so you're betting against somebody with lots of capital, but in that scenario it can definitely go very bad and it's important to read your fine print. I believe in 2020 some funds pointed out that in their fine print it said they get to choose not to follow a month's oil delivery if they need to, so, you expected $15M for the June oil because it went negative as you'd hoped, but too bad we've decided to roll that over to July oil, and that's going to lose you money as you have to wait a month longer and get worse results.
That sort of thing is obviously infuriating for an investor, but as with gambling firms who won't pay (and this happens a lot if you win serious money gambling, e.g. Oops, when you gave us $100 we forgot to ask for valid ID, but now that we owe you $150 000 because you got lucky we've remembered - without ID actually the bet was illegal, so here's the $100 back and no hard feelings) they get a reputation for not paying and that does eventually hurt them.
Isn't it the other way around? Because you would be stuck holding the bag the prices went negative?
Lmao, that's on the order of 1-2%.
Futures, specifically, are useful for implicitly borrowing commodities to control inventory levels across time. An airline needs continuous access to jet fuel, so to be safe, they buy more jet fuel than they need in the cash market. But they don't want to pay for owning all this jet fuel, so they simultaneously sell it off in the futures market. Thus, they have created a loan of jet fuel, making sure they have spare fuel available when they need it without outright having to own it.
In order to have a loan, one needs a speculator willing to buy the credit risk. More speculators usually leads to more liquidity and more accurate deals on loans. There's nothing wrong with this at all.
See The Economic Function of Futures Markets by Williams (1986) if you are curious.
If the airline wants to ensure future supply at a given prices they can simply buy futures settled in actual product.
Hedging against future volatility by agreeing on a deal "now" is the entire point. Sure, sometimes you lose when there's a price drop but the other guy won. At the end of the day everyone benefits from smoothing out the volatility.
Buying and selling cash settled futures is just how small time buyers and sellers access the market since they can't take delivery of entire train loads of goods but still need to hedge.
Finance professionals trading them around to wring out an extra percent here and there it beside the point.
For every person who is trying to hedge future volatility, there has to be a person on the other side of that contract who is speculating on the possibility that the hedge guy is more frightened that they should be.
You need hedgers and speculators to have a two-way market, and in markets where you have predominantly hedgers they get completely fleeced by the few speculators brave/dumb enough to take the other side of their trades. This is because many markets are structurally unbalanced such that the people who need to hedge long (producers) and people who need to hedge short (consumers) operate on different timeframes etc. So if I’m a farmer growing some crop I might want to sell the 1yr future, but the guy trying to hedge the price for purchase (wholesale grocer or whatever) will be hedging the front future like 1m out. So someone has to carry the risk in the forward curve between 1m and 1 year or noone gets the hedge they need and the market doesn’t work.
Quite aside from that, there are all sorts of things which are cash-settled because you literally can’t do a physical settlement but people need to hedge (yes and speculate) anyway. Take an index future on an equity index. How are you going to physically settle a future on the SPX or (god forbid) the Russell? The liquidity consequences would be devastating to markets.
Also, while origin stories are nice, most future trades are pure speculations on price. There is no reason to pretend these original stories are how securities are actually used.
Your story may make a bit more sense with options where one party can choose to exercises their right to sell or buy. Then you can use it to manage actual amounts of commodity. But futures do not carry any such option with it. It is strict agreement with no choices. The plane company can use futures to guarantee certain fuel price in the future, so that some short term market swing wont make fuel too expensive for them.
That is also not what Williams says. He says a simultaneous long cash--short future position is practically the same as a loan of the corresponding commodity. (With the lending side being short cash--long future.) This activity accounts for many of the patterns we see in futures markets.
This is a silly statement. Commodity producers absolutely do use futures markets to sell their product.
>More speculators usually leads to more liquidity and more accurate deals on loans.
More speculators also leads to more speculation which can lead to anywhere up to a complete disconnect of the price from anything to do with supply or demand.
Case in point: onion futures are illegal in the US https://en.wikipedia.org/wiki/Onion_Futures_Act
Why? The legitimate hedging role of futures and options is often financial in nature, even for physically-settled contracts.
Take West Texas Intermediate as an example. That's a physically-settled contract, with delivery in Cushing, Oklahoma.
What if I want to lock in a future price of oil but I'm not in Cushing, Oklahoma? Nobody's going to create a liquid futures market with delivery to my loading dock, but most of the time I can get oil on the spot market from a local supplier that already includes/amortizes the transportation cost.
It's far better for me to use the liquid futures market for hedging and still buy on the spot market, closing out the futures contract before delivery. For me, it's as if the futures market is cash-settled, even with a completely non-speculative transaction.
Imagine you're a software company in India, and you want to sign a 5-year contract with an American retailer. The retailer wants to know exactly how many Dollars they'll have to pay you for the software. You want to know exactly how many Rupees you will get to pay your employees.
Without futures, those two goals are incompatible, and the contract does not happen. With futures, the Indian company can decide to accept $1m, and buy a financial instrument that lets them exchange it in 5 years at current Rupee prices. They have to pay somebody for that privilege, but they know exactly how much they're paying, versus having an unbounded risk of currency fluctuations.
You can do the same with oil. Maybe you have no use for crude oil, but you expect your profits to fall as oil prices rise (maybe you're a transportation company locked into a long-term contract). You can hedge that risk by buying futures; if prices rise, you'll lose money on the contract, but you will make it up by selling the (now much more expensive) futures.
Not to sound Malthusian, but it was never going to happen that 9 billion people on the planet could live with a North American standard of life, and we stop global warming, and deforestation. It would be a sort of heat death for capitalism with no gradient of inequality left to extract value from.
Financialization is the last gasp attempt to make something from nothing. You're just betting on taking money from another person who is betting on taking money from you. The memeification of retail investing and the entire crypto market are the most naked version where there is simply no relation to any real resources.
https://www.skolnik.com/blog/oils-long-history-with-the-55-g...
These patterns are about speculation, not about managing inventories.
Buyers and sellers both want to hedge and they're both happy to give up some potential upside of getting one over on the other guy in exchange for stability.
As you mentioned, timeframes and volumes often don't match up perfectly. So enter the speculators. They provide a lot of the liquidity. And they get paid for it. Like they make a 1yr bet and 12 1mo counter bets and do that enough that the wins and losses smooth out and they make a few pennies on the dollar.
The futures market is basically a cyclone of financialization whipping around an eye of "actual business doing actual things" that needs to smooth out volatility (because you can't make a huge investment in a volatile market or you might get screwed into not being able to make payroll some quarter even though what you're up to is solvent any given year).
You can apply the same model to financial goods (and you often want to because the solvency of all sorts of banking activities is predicated on market conditions the same way that industrial activity is dependent upon commodity prices and you can't have good stuff going tits up because of a bad quarter)
But at the end of the day you need some core of participants who at the limit are willing to pay to limit/cap/reduce risk and volatility otherwise there's no market because the whole market is bets and counter bets about how that core activity will turn out.
At the end of the day there is a legitimate business need to hedge against future uncertainty. Everything else in the futures market derives from this, though sometimes the paths are nonsensical.
https://aoghs.org/transportation/history-of-the-42-gallon-oi...
A BBL is not just a standard quantity equal to 42 US gallons.
It's 42 US gallons @ 60 DEG F.
Now when they discovered oil in western Pennsylvania, one day there were farmers, the next day they were rich farmers.
They might not have had the highest education, but they didn't like getting ripped off. What was sought was precise 42 gallon liquid-tight wooden casks. So it could be assured if the barrel was within a couple inches of full, it contained a good 42 gallons.
When the oil made its way to a major port, there would be a large change of custody, and the buyers would want to be sure it was all there according to the documents.
This is when the cargo surveyors would inventory the barrels as they were being loaded on to the ships, plus check for fullness by opening the cork and sticking in their thumb. The replaced corks were often then sealed with wax identifying the inspector.
In the oilfield and the port this is how a very trusted barrel-maker ended up becoming a surveyor.
Plus it was somewhat recognized that liquids expand with heat and shrink with cold. With oil, different oils respond to temperature to different degrees.
This was well-established scientifically for generations with vegetable oils and whale oils, but was something new for petroleum companies to grasp.
In the laboratory, the surveyors made independent precise tables to correct oils for temperature, this was really essential after many barrels were emptied into a large storage tank, like they were long using for things like molasses or whale oil. The tank temperature is measured, and corrections are made to determine the billable quantity of BBL there would be if it was actually 60 DEG F.
And so it started out with surveyors having technology quite a bit beyond what oil companies had. (The unspoken thing is that the surveyor has to be trustworthy more so than the oil company.)
Well, I have always refused to relent :)
With numerous gifted engineers and now even an abundance of PhD's, the majors with their resources have been unlimited for quite some time before I was born, compared to my labs being minuscule by comparison.
So what. A significant part of my life's work is carrying on the technology advantage that I directly inherited from that 19th century origin anyway. I just could never settle for what many oil companies settle for using the latest instrumentation & techniques over the decades. Chemicals too, with way more byzantine technology needs, but they're mostly billed by weight, not volume. Plenty of room for improvement across the board.
I guess I'm an energy guy, but have always been interested in solar more than oil, too bad there was no way that would pay the bills during the Reagan Recession, so I joined a hundred-year-old company when the startup research lab I was helping build ended up imploding. There was also one notable ex-plosion too, which happened seconds after I was there taking a reading, and it was an engineering defect. Since I was almost a victim I had to overengineer the weaknesses that the actual engineers had failed at. You get used to it after a while.
People are just not careful enough, whether it's equations or toxins :\
You are not required to take loan to buy futures. You can do so, because then you can bet more then you have. But you dont have to.
https://www.cmegroup.com/education/courses/introduction-to-f... what-is-needed.html
"Futures margin is the amount of money that you must deposit and keep on hand with your broker when you open a futures position. It is not a down payment and you do not own the underlying commodity."
Notice you have to have margin on deposit to open any futures position.
But also i don't really understand what you mean by infinitely perishable? Can you explain more?
When a clould provider pretends to sell you five minutes of compute they are not really selling you five minutes of compute, but promising to split off five minutes of partial compute from other tenants to make room for you. It gets a little complicated...