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What I don't understand is why the sudden move today? Did the longs think they had a place to put the oil on Friday but found out over the weekend they had no p

What I don't understand is why the sudden move today? Did the longs think they had a place to put the oil on Friday but found out over the weekend they had no place to put it? Just seems like you would know what to do with the oil on Friday. Note this is not a rhetorical question, I would sincerely like an answer.

tempsy 7y ago
It’s called super contango. And storage has not run out yet. Cushing is not full. The problem is traders are anticipating storage will become very expensive as remaining capacity decreases, so if you’re holding on to May contracts and you’re not using the oil because there’s a glut right now then you’re going to be paying a lot more to keep storing the oil for future months as storage costs go up. The huge discount reflects that cost.
- jjallen 7y ago
  Sorry to miss it, but how does this answer my question? I asked why they weren't prepared on Friday. Storage has been expensive and getting more expensive for weeks. We've been in a massive contango for weeks. Why weren't they prepared on Friday for physical delivery?
  - tempsy 7y ago
    Most oil traders don’t actually want physical delivery. They are just trying to profit off price movements. Traders have moved on to June contracts already. There’s no volume on May contracts at this point. No one wants to actually pay for physical delivery so the price is tanking since there are no bids as we get closer to expiration tomorrow.
    - kietdlam 7y ago
      You still haven't answered the question...
      - bluGill 7y ago
        Most traders don't have any oil to sell. What is left are those who have storage space making a deal on the traders too stupid to get out already. This isn't many, but since there is no demand those with storage space can offer very low prices and get the rest of them.
      - tempsy 7y ago
        things happen when you get closer to contract expiration. Today is closer than Friday.
      - OJFord 7y ago
        It might go negative - no, just has, as I write - if you were bag holding on Friday you might carry on in the hope of some recovery, but you don't want physical delivery so you were always going to sell today no matter what; closer it gets to expiry, or to $0, the more push has come to shove and you're finally closing your position.
      - ToFundorNot 7y ago
        I'm going to try and translate the simplest concept that tempsy is saying. The sellers were looking to sell for most of last week, however there fewer buyers as the contract approached its end, and those who were willing to buy wanted a lower price: Volume of transactions on Friday was 344k, Thursday was 111m, Wednesday was 147m. In the past 30 days, the low was 686k (ex Friday), and the high was 459m. Traders slowed their buying so the market became one sided.
        cma 7y ago
        That still doesn't answer: why wasn't it anticipated and reflected in earlier pricing (even if volume-weighted it would be a much smaller drop, it still seems to have been missed even from futures options)?
        andrewstuart2 7y ago
        If you have the answer to the question you are asking, you should change careers into oil contract trading; you'll probably make a bundle. In short, the reason nobody anticipated it is because the future is unknown. The reason any market is unpredictable is because there are too many variables to account for.
    - CountSessine 7y ago
      So does this mean that without bids there are potentially many traders, not refiners or tank farms, holding those contracts still? That those traders will get stuck with taking delivery because they couldn't unload their contracts?
      - tempsy 7y ago
        Yes
        mcv 7y ago
        People with just a paper office, used to deal in numbers rather than anything physical, and with no place to store physical goods, will now have to figure out where and how to store lots of oil?
        simonh 7y ago
        They would if they didn’t offload the contracts somehow, hence the negative prices. They are paying to get rid of that obligation.
        dmurray 7y ago
        No. Their prime brokers will force them to sell it at the low (negative) price.
        riskneutral 7y ago
        They already know how to store lots of oil. They can and do rent supertankers for example.
        hermitdev 7y ago
        Having worked in the finance industry my entire career, most (responsible) firms have means for dealing with taking physical delivery. Less responsible firms, not so much and may be royally screwed if they have to take delivery. I've heard anecdotally of a firm that had to take physical delivery of a shipment of coal. They didn't have plans in place, but because they had an address on a river, the coal arrived via barge. No, I don't recall the name of the firm, and yes, it's just an anecdote/hearsay.
  - selectodude 7y ago
    It's only a paper loss until you sell. Everybody was hoping and praying things would change and now that it's abundantly clear that it's not changing, they're desperately trying to unwind their positions.
    - tempsy 7y ago
      Not really. If you hold contracts at expiration (May expires tomorrow) then you are forced to take physical delivery of oil. No one wants oil right now, and if you take physical delivery you’re going to have to pay big premiums to store oil at Cushing. The discount reflects the premium storage costs. Most oil traders just want to profit off price movements and not actually own physical oil. There’s no volume on May contracts now they’ve all moved on to June.
      - SilasX 7y ago
        Do you know what happens if you can’t take physical delivery? As in the financial consequences including penalties assigned by the exchange?
        hermitdev 7y ago
        My understanding is you still take delivery. It might be in the form of a fleet of tankers or barges arriving at your office. But, you will take delivery, whether you like it or not. Any responsible trading firm that deals in futures should have mechanisms in place to deal with physical delivery.
        VLM 7y ago
        Chapter 200 doesn't go into much detail but chapter 7 (for metals) explains how the exchange will facilitate an independent middleman to store until arrangements are made and they will bill you for that service. I have not been involved in chapter 200 operations but I've heard socially this occasionally happens relating to substandard product. "We agreed on light sweet crude in the contract but you tried to deliver sour tar". The exchange knows its all going to get dragged into court eventually, so they try to be fair and transparent and well documented. There are plenty of people renting tank space as a normal business operation. I don't think you're going to get Force Majeure protection. That's for something neutral to all parties like a hurricane, not one side of the contract didn't feel like closing out and doesn't have tank space lined up.
  - aguyfromnb 7y ago
    >I asked why they weren't prepared on Friday. What, exactly, do you expect them do to "prepare"? Friday they had more time to unload the contracts, and today they have less.
    - eru 7y ago
      How to prepare: Sell futures on Friday, buy today (to close out the position). Profit from the predictable price difference.
      - edoceo 7y ago
        Was it predictable tho?
        eru 7y ago
        Well, that was exactly the question!
        shadowgovt 7y ago
        Yes, it was predicted successfully (by everyone who is no longer holding a contract). It was also not predicted successfully (by everyone paying through the nose so they won't have to find a place to stash some barrels of a volatile compound).
        eru 7y ago
        It wasn't predicted successfully on average. Otherwise Friday would have already anticipated today's price.
        fredophile 7y ago
        How far do you want to take that argument? If successfully predicting it would mean that prices dropped to zero on Friday then shouldn't that have also been successfully predicted and impacted the price on Thursday? What about Wednesday, Tuesday, Monday?
  - fpoling 7y ago
    Read “Fooled by randomness” by Nassim Taleb.
- jliptzin 7y ago
  If cushing is not full, why aren't people buying at $2 a barrel now and storing for one month, selling the June contract at the same time and collecting a $20k profit per contract?
  - tempsy 7y ago
    What are you going to do with the oil after one month? No one needs oil right now so if you take physical delivery it’s going to be sitting there for longer than a month.
    - greenshackle2 7y ago
      > selling the June contract at the same time They would not be the one holding that particular bag.
      - tempsy 7y ago
        if only arbitrage was that easy...
        agseward 7y ago
        That's literally what futures contracts are for.
        greenshackle2 7y ago
        In a discussion about negative future prices no less. If buyers could refuse physical delivery, that's what they would be doing now, not selling at negative prices.
        greenshackle2 7y ago
        You still have to store the oil for a month. Which is expensive right now. Which is precisely why the May future is so cheap in the first place. I'm just rebutting that you will be stuck with the oil after June. Since they specifically said, they would sell a June contract immediately.
deleted 7y ago
[deleted]
cascom 7y ago
By definition all open futures contracts have to either a) be Physically delivered Or b) be closed (remember that for futures contracts there is someone on each side (prepared to deliver 1,000 bbl and prepared to receive 1,000 bbl) Now if you are a financial participant you need to close out your position as you are not in a position to either deliver/receive physical oil - so you need to essentially pay whatever it takes to close out the contract. In normal times there is plenty of storage and physical participants that are willing to provide liquidity as the contracts come to maturity. Now imagine you are a physical participant, and now space is limited/storage is expensive/ natural buyers aren’t buying (refiners) - you are not going to pay much to buy the oil of a financial participant who needs to sell the May contract to roll into June/July...
- ping_pong 7y ago
  This isn't true for all contracts. For example, gold contracts are/can be settled for cash. I remember during the Great Recession talks about gold conspiracies and that gold futures contracts can be forced settled in cash instead of physical delivery. I'm not sure if that's true or if that's part of the futures contract, though.
  - cascom 7y ago
    The context here is oil - the benchmark contract and the one referenced in the article is the NYMEX CL (WTI/Cushing) it’s a deliverable contract. https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html https://www.cmegroup.com/trading/energy/crude-oil/light-swee...
clairity 7y ago
> "What I don't understand is why the sudden move today?" time is information, so closing out an option (like a short or a futures contract) prematurely tends to eat value on average. however, in this case, the new information was so material and overwhelmingly bad, that you're probably correct that most should have closed out early and taken a smaller loss.
lordnacho 7y ago
> What I don't understand is why the sudden move today? Did the longs think they had a place to put the oil on Friday but found out over the weekend they had no place to put it? Just seems like you would know what to do with the oil on Friday. Note this is not a rhetorical question, I would sincerely like an answer. Guys like myself, an ex fund manager, could be tourists in the oil market. I know I was, speculating occasionally on oil without knowing a whole lot about the details. Plenty of macro guys are similar, they bet on the large movements as the opportunites present themselves and don't worry about the details. So what has probably happened is some of these tourists have had a few contracts left over that they forgot about or didn't discover in their position keeping until their prime brokers phoned them, and they had to dump into a market under very special conditions. Hopefully not very many contracts. In normal times if you screwed up and had to do delivery, it stil wouldn't be a big problem, because the storage is available and you essentially just buy it (by trading with a guy who actually knows how to organize it), costing relatively little.
- 0x8BADF00D 7y ago
  A really risky (but I think worth the risk) bet is to buy the front and sell the back. You will receive a huge credit, and as long as you close out the back leg below what you sold for, you’re in the clear.
  - lordnacho 7y ago
    This isn't possible, except for people who can deal with the physical logistics. If you buy the front, you need to put the stuff somewhere for a month. Chances are the people who got stuck selling at negative prices were actually doing just what you describe, they just weren't planning on the spread blowing out from physical issues.
    - 0x8BADF00D 7y ago
      I don’t see supercontango lasting forever. At some point oil demand will rise. Even if it’s a small rise. And you typically should close out combination orders well before expiration.
MR4D 7y ago
> Did the longs think they had a place to put the oil on Friday but found out over the weekend they had no place to put it? No, the Friday longs had a place to put it. But given it's late in the month, the people buying on Friday were probably finishing up their orders for the prompt month. Today, by comparison, there were no buyers, only sellers. Hence the drastic change in price. If there had been more buyers, the price would have been significantly higher (this is why next month's contract price is so much higher (in the $20's). > Just seems like you would know what to do with the oil on Friday. To be clear, they did. The people who had oil for sale and were holding out for a higher selling price who did not sell what they needed to sell last Friday are eating their shirts today. Their "greed" (relative, not necessarily Gordon Gecko style greed) caused them to lose a lot of money. Somebody will be firing oil traders this week. Not sure if that will make headlines. But somebody's book definitely blew up because they tried to get a higher price last week and ran into today's sale. Could be a hedge fund, could be an oil producer. But definitely look for this news soon.

tempsy 7y ago

It’s called super contango. And storage has not run out yet. Cushing is not full. The problem is traders are anticipating storage will become very expensive as remaining capacity decreases, so if you’re holding on to May contracts and you’re not using the oil because there’s a glut right now then you’re going to be paying a lot more to keep storing the oil for future months as storage costs go up. The huge discount reflects that cost.

jjallen 7y ago
Sorry to miss it, but how does this answer my question? I asked why they weren't prepared on Friday. Storage has been expensive and getting more expensive for weeks. We've been in a massive contango for weeks. Why weren't they prepared on Friday for physical delivery?
- tempsy 7y ago
  Most oil traders don’t actually want physical delivery. They are just trying to profit off price movements. Traders have moved on to June contracts already. There’s no volume on May contracts at this point. No one wants to actually pay for physical delivery so the price is tanking since there are no bids as we get closer to expiration tomorrow.
  - kietdlam 7y ago
    You still haven't answered the question...
    - bluGill 7y ago
      Most traders don't have any oil to sell. What is left are those who have storage space making a deal on the traders too stupid to get out already. This isn't many, but since there is no demand those with storage space can offer very low prices and get the rest of them.
    - tempsy 7y ago
      things happen when you get closer to contract expiration. Today is closer than Friday.
    - OJFord 7y ago
      It might go negative - no, just has, as I write - if you were bag holding on Friday you might carry on in the hope of some recovery, but you don't want physical delivery so you were always going to sell today no matter what; closer it gets to expiry, or to $0, the more push has come to shove and you're finally closing your position.
    - ToFundorNot 7y ago
      I'm going to try and translate the simplest concept that tempsy is saying. The sellers were looking to sell for most of last week, however there fewer buyers as the contract approached its end, and those who were willing to buy wanted a lower price: Volume of transactions on Friday was 344k, Thursday was 111m, Wednesday was 147m. In the past 30 days, the low was 686k (ex Friday), and the high was 459m. Traders slowed their buying so the market became one sided.
      - cma 7y ago
        That still doesn't answer: why wasn't it anticipated and reflected in earlier pricing (even if volume-weighted it would be a much smaller drop, it still seems to have been missed even from futures options)?
        andrewstuart2 7y ago
        If you have the answer to the question you are asking, you should change careers into oil contract trading; you'll probably make a bundle. In short, the reason nobody anticipated it is because the future is unknown. The reason any market is unpredictable is because there are too many variables to account for.
  - CountSessine 7y ago
    So does this mean that without bids there are potentially many traders, not refiners or tank farms, holding those contracts still? That those traders will get stuck with taking delivery because they couldn't unload their contracts?
    - tempsy 7y ago
      Yes
      - mcv 7y ago
        People with just a paper office, used to deal in numbers rather than anything physical, and with no place to store physical goods, will now have to figure out where and how to store lots of oil?
        simonh 7y ago
        They would if they didn’t offload the contracts somehow, hence the negative prices. They are paying to get rid of that obligation.
        dmurray 7y ago
        No. Their prime brokers will force them to sell it at the low (negative) price.
        riskneutral 7y ago
        They already know how to store lots of oil. They can and do rent supertankers for example.
        hermitdev 7y ago
        Having worked in the finance industry my entire career, most (responsible) firms have means for dealing with taking physical delivery. Less responsible firms, not so much and may be royally screwed if they have to take delivery. I've heard anecdotally of a firm that had to take physical delivery of a shipment of coal. They didn't have plans in place, but because they had an address on a river, the coal arrived via barge. No, I don't recall the name of the firm, and yes, it's just an anecdote/hearsay.
- selectodude 7y ago
  It's only a paper loss until you sell. Everybody was hoping and praying things would change and now that it's abundantly clear that it's not changing, they're desperately trying to unwind their positions.
  - tempsy 7y ago
    Not really. If you hold contracts at expiration (May expires tomorrow) then you are forced to take physical delivery of oil. No one wants oil right now, and if you take physical delivery you’re going to have to pay big premiums to store oil at Cushing. The discount reflects the premium storage costs. Most oil traders just want to profit off price movements and not actually own physical oil. There’s no volume on May contracts now they’ve all moved on to June.
    - SilasX 7y ago
      Do you know what happens if you can’t take physical delivery? As in the financial consequences including penalties assigned by the exchange?
      - hermitdev 7y ago
        My understanding is you still take delivery. It might be in the form of a fleet of tankers or barges arriving at your office. But, you will take delivery, whether you like it or not. Any responsible trading firm that deals in futures should have mechanisms in place to deal with physical delivery.
      - VLM 7y ago
        Chapter 200 doesn't go into much detail but chapter 7 (for metals) explains how the exchange will facilitate an independent middleman to store until arrangements are made and they will bill you for that service. I have not been involved in chapter 200 operations but I've heard socially this occasionally happens relating to substandard product. "We agreed on light sweet crude in the contract but you tried to deliver sour tar". The exchange knows its all going to get dragged into court eventually, so they try to be fair and transparent and well documented. There are plenty of people renting tank space as a normal business operation. I don't think you're going to get Force Majeure protection. That's for something neutral to all parties like a hurricane, not one side of the contract didn't feel like closing out and doesn't have tank space lined up.
- aguyfromnb 7y ago
  >I asked why they weren't prepared on Friday. What, exactly, do you expect them do to "prepare"? Friday they had more time to unload the contracts, and today they have less.
  - eru 7y ago
    How to prepare: Sell futures on Friday, buy today (to close out the position). Profit from the predictable price difference.
    - edoceo 7y ago
      Was it predictable tho?
      - eru 7y ago
        Well, that was exactly the question!
      - shadowgovt 7y ago
        Yes, it was predicted successfully (by everyone who is no longer holding a contract). It was also not predicted successfully (by everyone paying through the nose so they won't have to find a place to stash some barrels of a volatile compound).
        eru 7y ago
        It wasn't predicted successfully on average. Otherwise Friday would have already anticipated today's price.
        fredophile 7y ago
        How far do you want to take that argument? If successfully predicting it would mean that prices dropped to zero on Friday then shouldn't that have also been successfully predicted and impacted the price on Thursday? What about Wednesday, Tuesday, Monday?
- fpoling 7y ago
  Read “Fooled by randomness” by Nassim Taleb.
jliptzin 7y ago
If cushing is not full, why aren't people buying at $2 a barrel now and storing for one month, selling the June contract at the same time and collecting a $20k profit per contract?
- tempsy 7y ago
  What are you going to do with the oil after one month? No one needs oil right now so if you take physical delivery it’s going to be sitting there for longer than a month.
  - greenshackle2 7y ago
    > selling the June contract at the same time They would not be the one holding that particular bag.
    - tempsy 7y ago
      if only arbitrage was that easy...
      - agseward 7y ago
        That's literally what futures contracts are for.
        greenshackle2 7y ago
        In a discussion about negative future prices no less. If buyers could refuse physical delivery, that's what they would be doing now, not selling at negative prices.
      - greenshackle2 7y ago
        You still have to store the oil for a month. Which is expensive right now. Which is precisely why the May future is so cheap in the first place. I'm just rebutting that you will be stuck with the oil after June. Since they specifically said, they would sell a June contract immediately.

deleted 7y ago

[deleted]

cascom 7y ago

By definition all open futures contracts have to either a) be Physically delivered Or b) be closed (remember that for futures contracts there is someone on each side (prepared to deliver 1,000 bbl and prepared to receive 1,000 bbl) Now if you are a financial participant you need to close out your position as you are not in a position to either deliver/receive physical oil - so you need to essentially pay whatever it takes to close out the contract. In normal times there is plenty of storage and physical participants that are willing to provide liquidity as the contracts come to maturity. Now imagine you are a physical participant, and now space is limited/storage is expensive/ natural buyers aren’t buying (refiners) - you are not going to pay much to buy the oil of a financial participant who needs to sell the May contract to roll into June/July...

ping_pong 7y ago
This isn't true for all contracts. For example, gold contracts are/can be settled for cash. I remember during the Great Recession talks about gold conspiracies and that gold futures contracts can be forced settled in cash instead of physical delivery. I'm not sure if that's true or if that's part of the futures contract, though.
- cascom 7y ago
  The context here is oil - the benchmark contract and the one referenced in the article is the NYMEX CL (WTI/Cushing) it’s a deliverable contract. https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html https://www.cmegroup.com/trading/energy/crude-oil/light-swee...

clairity 7y ago

> "What I don't understand is why the sudden move today?" time is information, so closing out an option (like a short or a futures contract) prematurely tends to eat value on average. however, in this case, the new information was so material and overwhelmingly bad, that you're probably correct that most should have closed out early and taken a smaller loss.

lordnacho 7y ago

> What I don't understand is why the sudden move today? Did the longs think they had a place to put the oil on Friday but found out over the weekend they had no place to put it? Just seems like you would know what to do with the oil on Friday. Note this is not a rhetorical question, I would sincerely like an answer. Guys like myself, an ex fund manager, could be tourists in the oil market. I know I was, speculating occasionally on oil without knowing a whole lot about the details. Plenty of macro guys are similar, they bet on the large movements as the opportunites present themselves and don't worry about the details. So what has probably happened is some of these tourists have had a few contracts left over that they forgot about or didn't discover in their position keeping until their prime brokers phoned them, and they had to dump into a market under very special conditions. Hopefully not very many contracts. In normal times if you screwed up and had to do delivery, it stil wouldn't be a big problem, because the storage is available and you essentially just buy it (by trading with a guy who actually knows how to organize it), costing relatively little.

0x8BADF00D 7y ago
A really risky (but I think worth the risk) bet is to buy the front and sell the back. You will receive a huge credit, and as long as you close out the back leg below what you sold for, you’re in the clear.
- lordnacho 7y ago
  This isn't possible, except for people who can deal with the physical logistics. If you buy the front, you need to put the stuff somewhere for a month. Chances are the people who got stuck selling at negative prices were actually doing just what you describe, they just weren't planning on the spread blowing out from physical issues.
  - 0x8BADF00D 7y ago
    I don’t see supercontango lasting forever. At some point oil demand will rise. Even if it’s a small rise. And you typically should close out combination orders well before expiration.

MR4D 7y ago

> Did the longs think they had a place to put the oil on Friday but found out over the weekend they had no place to put it? No, the Friday longs had a place to put it. But given it's late in the month, the people buying on Friday were probably finishing up their orders for the prompt month. Today, by comparison, there were no buyers, only sellers. Hence the drastic change in price. If there had been more buyers, the price would have been significantly higher (this is why next month's contract price is so much higher (in the $20's). > Just seems like you would know what to do with the oil on Friday. To be clear, they did. The people who had oil for sale and were holding out for a higher selling price who did not sell what they needed to sell last Friday are eating their shirts today. Their "greed" (relative, not necessarily Gordon Gecko style greed) caused them to lose a lot of money. Somebody will be firing oil traders this week. Not sure if that will make headlines. But somebody's book definitely blew up because they tried to get a higher price last week and ran into today's sale. Could be a hedge fund, could be an oil producer. But definitely look for this news soon.