7 ms·

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

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.
      - option_greek 7y ago
        It just implies that any profit made by arbitraging June contract with May by taking physical delivery doesn't cover the storage costs (which is hard to believe at $22 difference but that's what market seems to indicate).
  - deleted 7y ago
    [deleted]
zeusk 7y ago
Because of storage costs and uncertainties, it wasn't only the saudi-russia fallout that caused this - demand has literally flatlined comparatively due to lockdowns everywhere.
markus_zhang 7y ago
Mostly the storage cost. Let's go extreme, say you managed to grab the contract at $0, which may actually happen today. Now you need to 1) Find transportation and storage 2) Sell it on the market as quickly as possible, at a reasonable cost. Pretty tough TBH, unless someone is planning a war in Middle East and is grabbing up the contracts and you know about it...
aguyfromnb 7y ago
>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? Good question. The answer is because they don't think it will be profitable. Why aren't you?
- colinmhayes 7y ago
  I've never been to Cushing Oklahoma. I feel like it should be possible to build a big tank in a week or two. Why isn't available storage space skyrocketing?
  - edoceo 7y ago
    It's not possible to build a tank in two weeks, even if you had all the material and equipment at the ready. Plus, capital intensive for what may only be a spike in storage. These physical goods are much harder to store than bits.
  - alasdair_ 7y ago
    There are regulations covering storing enormous quantities of oil, including certification of the holding tanks etc. For example, any container over 55 gallons is subject to EPA regulation and counts towards the total permitted site quantity. Storing more than 1,320 gallons above ground requires the site to have an approved SPCC (Spill Prevention, Control, and Countermeasures) plan. You can store 42,000 gallons below ground but that requires excavation, permits etc. Basically: it's difficult to do on short notice. Further reading: https://www.epa.gov/ust/aboveground-storage-tanks https://www.epa.gov/ust/aboveground-storage-tanks
  - WJW 7y ago
    There is a little bit more to an oil tank than just steel walls. You need proper foundations, fire prevention systems, disaster plans, probably get hooked up to the pipeline network, etc etc etc. Even if it were quick, the amount of oil being pumped up is massive and you need more than a few tanks to store it all. Finally, tanks are long term infrastructure and it might not be profitable to build out storage too much just in the hope of catching once-in-a-lifetime negative pricing events.
refurb 7y ago
Just a guess, but maybe the consensus is that June is going to be the same (or worse) as May and they are going to have trouble unloading those contracts? It may come to the point that you're paying some to take the contract.
- lalaithion 7y ago
  But then the price in June should also be down.
  - smileysteve 7y ago
    It is down, it's just not down to $0.
    - macawfish 7y ago
      Not yet it's not
  - deleted 7y ago
    [deleted]
- greenshackle2 7y ago
  You're selling the June contract right now. There will be nothing to unload. Whoever is holding your June contract when it expires will be the one left holding the bag (well, the barrels). That's the whole point of futures. The problem is that you have to store the oil for a month which is pretty expensive right now.
vkou 7y ago
Because you can't just rent a U-Stor-it space, and dump a bunch of full oil barrels into it. You need a specialized facility. And all of those facilities are full. The ones that aren't are charging an arm and a leg for storage services.
- sdffdsfdsfsddsf 7y ago
  What about tankers?
  - Tuna-Fish 7y ago
    Also full. The proportion of the global tanker fleet that is just full of oil sitting off coast near refineries is at an all time high. A lot of speculators were betting that oil prices were going to go up and had rented ships and filled them with oil they though was cheap, before COVID-19 even hit. Since then, oil prices have absolutely cratered.
    - willturman 7y ago
      How do these tanker contracts work? Are speculators leasing the tankers on a month to month basis? What happens when/if the tanker isn't offloaded at the end of a contract?
      - cascom 7y ago
        Typically most tankers are owner operated, under a long-term charter or on the spot market they are doing jobs that days/weeks/months It’s a pretty efficient market See this article (Suspect rates have climbed even further as the storage trade becomes more lucrative. https://www.forbes.com/sites/gauravsharma/2020/03/12/supertanker-prices-spike-by-nearly-678-as-oil-price-tanks/#349493947e39 https://www.forbes.com/sites/gauravsharma/2020/03/12/superta...
freefal 7y ago
This is a good question. The fact that people are not buying the May future at -$37/bbl and selling the June contract at $20/bbl tells you that Cushing storage must effectively be full and that the theoretical storage figures quoted in research are not practically usable (at least at short notice). It's very hard to imagine any practical means of storage that isn't wildly profitable to utilize for $57/bbl/month.
OJFord 7y ago
Because storage is not free, and if that were such obvious profit, why would the guy writing you a May contract not do that themself, and write June instead?
darkwizard42 7y ago
Many have answered about storage costs. Easy way to think about it might be a grocery store. You hear about a sale on cereal for $0.01 a box. Great deal but then you find out that you can't walk there, you can only take Lyft/Uber and it costs $100 each way to get to the store. So in reality its not as good a deal as it sounds.
- NullPrefix 7y ago
  >you can only take Lyft/Uber and it costs $100 each way to get to the store Hard to follow this analogy
  - eitally 7y ago
    The part about depending on only semi-reliable third parties for your logistics, or the part about the supply chain costs being 1000x your material cost?
    - NullPrefix 7y ago
      The part where a trip to the grocery store costs $100
      - benibela 7y ago
        Surge pricing because everyone wants to get the deal there
        NullPrefix 7y ago
        What's stopping you from taking a car or a bike ride to save $100?

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.
    - option_greek 7y ago
      It just implies that any profit made by arbitraging June contract with May by taking physical delivery doesn't cover the storage costs (which is hard to believe at $22 difference but that's what market seems to indicate).
- deleted 7y ago
  [deleted]

zeusk 7y ago

Because of storage costs and uncertainties, it wasn't only the saudi-russia fallout that caused this - demand has literally flatlined comparatively due to lockdowns everywhere.

markus_zhang 7y ago

Mostly the storage cost. Let's go extreme, say you managed to grab the contract at $0, which may actually happen today. Now you need to 1) Find transportation and storage 2) Sell it on the market as quickly as possible, at a reasonable cost. Pretty tough TBH, unless someone is planning a war in Middle East and is grabbing up the contracts and you know about it...

aguyfromnb 7y ago

>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? Good question. The answer is because they don't think it will be profitable. Why aren't you?

colinmhayes 7y ago
I've never been to Cushing Oklahoma. I feel like it should be possible to build a big tank in a week or two. Why isn't available storage space skyrocketing?
- edoceo 7y ago
  It's not possible to build a tank in two weeks, even if you had all the material and equipment at the ready. Plus, capital intensive for what may only be a spike in storage. These physical goods are much harder to store than bits.
- alasdair_ 7y ago
  There are regulations covering storing enormous quantities of oil, including certification of the holding tanks etc. For example, any container over 55 gallons is subject to EPA regulation and counts towards the total permitted site quantity. Storing more than 1,320 gallons above ground requires the site to have an approved SPCC (Spill Prevention, Control, and Countermeasures) plan. You can store 42,000 gallons below ground but that requires excavation, permits etc. Basically: it's difficult to do on short notice. Further reading: https://www.epa.gov/ust/aboveground-storage-tanks https://www.epa.gov/ust/aboveground-storage-tanks
- WJW 7y ago
  There is a little bit more to an oil tank than just steel walls. You need proper foundations, fire prevention systems, disaster plans, probably get hooked up to the pipeline network, etc etc etc. Even if it were quick, the amount of oil being pumped up is massive and you need more than a few tanks to store it all. Finally, tanks are long term infrastructure and it might not be profitable to build out storage too much just in the hope of catching once-in-a-lifetime negative pricing events.

refurb 7y ago

Just a guess, but maybe the consensus is that June is going to be the same (or worse) as May and they are going to have trouble unloading those contracts? It may come to the point that you're paying some to take the contract.

lalaithion 7y ago
But then the price in June should also be down.
- smileysteve 7y ago
  It is down, it's just not down to $0.
  - macawfish 7y ago
    Not yet it's not
- deleted 7y ago
  [deleted]
greenshackle2 7y ago
You're selling the June contract right now. There will be nothing to unload. Whoever is holding your June contract when it expires will be the one left holding the bag (well, the barrels). That's the whole point of futures. The problem is that you have to store the oil for a month which is pretty expensive right now.

vkou 7y ago

Because you can't just rent a U-Stor-it space, and dump a bunch of full oil barrels into it. You need a specialized facility. And all of those facilities are full. The ones that aren't are charging an arm and a leg for storage services.

sdffdsfdsfsddsf 7y ago
What about tankers?
- Tuna-Fish 7y ago
  Also full. The proportion of the global tanker fleet that is just full of oil sitting off coast near refineries is at an all time high. A lot of speculators were betting that oil prices were going to go up and had rented ships and filled them with oil they though was cheap, before COVID-19 even hit. Since then, oil prices have absolutely cratered.
  - willturman 7y ago
    How do these tanker contracts work? Are speculators leasing the tankers on a month to month basis? What happens when/if the tanker isn't offloaded at the end of a contract?
    - cascom 7y ago
      Typically most tankers are owner operated, under a long-term charter or on the spot market they are doing jobs that days/weeks/months It’s a pretty efficient market See this article (Suspect rates have climbed even further as the storage trade becomes more lucrative. https://www.forbes.com/sites/gauravsharma/2020/03/12/supertanker-prices-spike-by-nearly-678-as-oil-price-tanks/#349493947e39 https://www.forbes.com/sites/gauravsharma/2020/03/12/superta...

freefal 7y ago

This is a good question. The fact that people are not buying the May future at -$37/bbl and selling the June contract at $20/bbl tells you that Cushing storage must effectively be full and that the theoretical storage figures quoted in research are not practically usable (at least at short notice). It's very hard to imagine any practical means of storage that isn't wildly profitable to utilize for $57/bbl/month.

OJFord 7y ago

Because storage is not free, and if that were such obvious profit, why would the guy writing you a May contract not do that themself, and write June instead?

darkwizard42 7y ago

Many have answered about storage costs. Easy way to think about it might be a grocery store. You hear about a sale on cereal for $0.01 a box. Great deal but then you find out that you can't walk there, you can only take Lyft/Uber and it costs $100 each way to get to the store. So in reality its not as good a deal as it sounds.

NullPrefix 7y ago
>you can only take Lyft/Uber and it costs $100 each way to get to the store Hard to follow this analogy
- eitally 7y ago
  The part about depending on only semi-reliable third parties for your logistics, or the part about the supply chain costs being 1000x your material cost?
  - NullPrefix 7y ago
    The part where a trip to the grocery store costs $100
    - benibela 7y ago
      Surge pricing because everyone wants to get the deal there
      - NullPrefix 7y ago
        What's stopping you from taking a car or a bike ride to save $100?