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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

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.
        cma 7y ago
        I think he's asking why the market didn't have a better estimate of storage capacity and utilization and what changed in the estimate from yesterday to today.
        andrewstuart2 7y ago
        I think that has to do with how people sometimes do analysis for trading. There's fundamental analysis, which looks at exactly that when attempting to determine the price to bid for a security, but then there's the bubblier "technical analysis" which really just looks at historical and current trends and attempts to divine whether buying now means you might be able to sell in the future. I'd imagine people just assumed perfect liquidity here, and that they'd be able to sell even "at a small loss which is better than nothing," not realizing that nothing or negative (i.e. you're gonna pay somebody to take this oil off your hands or build your own tanks) is a valid outcome.
  - Digory 7y ago
    -$37.00 is a distress price, just for the unwitting investors who agreed to play “Hot Potato: Bloodsport.” By definition, you’re looking at the price for people who wouldn’t want to play, if they could avoid playing. They are literally over a barrel. If they don’t get out, the broker gets to screw them even worse at the deadline. Volume was up, because some people were going through heroics to close their position at all costs. But the end of day price is for those who got screwed: the truly unaware who didn’t realize they were out of time, or didn’t think about it going past $0. It’s probably relatively few people, despite today’s volume. When you lose control, someone agrees for you that you’ll pay $37/bb to get out.
- 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.

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.
      - cma 7y ago
        I think he's asking why the market didn't have a better estimate of storage capacity and utilization and what changed in the estimate from yesterday to today.
        andrewstuart2 7y ago
        I think that has to do with how people sometimes do analysis for trading. There's fundamental analysis, which looks at exactly that when attempting to determine the price to bid for a security, but then there's the bubblier "technical analysis" which really just looks at historical and current trends and attempts to divine whether buying now means you might be able to sell in the future. I'd imagine people just assumed perfect liquidity here, and that they'd be able to sell even "at a small loss which is better than nothing," not realizing that nothing or negative (i.e. you're gonna pay somebody to take this oil off your hands or build your own tanks) is a valid outcome.
- Digory 7y ago
  -$37.00 is a distress price, just for the unwitting investors who agreed to play “Hot Potato: Bloodsport.” By definition, you’re looking at the price for people who wouldn’t want to play, if they could avoid playing. They are literally over a barrel. If they don’t get out, the broker gets to screw them even worse at the deadline. Volume was up, because some people were going through heroics to close their position at all costs. But the end of day price is for those who got screwed: the truly unaware who didn’t realize they were out of time, or didn’t think about it going past $0. It’s probably relatively few people, despite today’s volume. When you lose control, someone agrees for you that you’ll pay $37/bb to get out.
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.