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So they start off the article with this statement: "That means oil producers are paying buyers to take the commodity off their hands over fears that storage ca

So they start off the article with this statement: "That means oil producers are paying buyers to take the commodity off their hands over fears that storage capacity could run out in May." This statement is actually totally false. Producers already got paid for this production a long time ago when they initially sold the futures contract. What has actually happened is that as the expiry of the May futures contracts arrives, the traders who bought those contracts are now trying to unload them at all costs. This is because if they're stuck holding the contract at expiry, they have to take physical delivery (each futures contract represents 1000 barrels of oil), and the cost of storing that oil is getting really high since the storage facilities are nearly full. Later they kind of explain this in the article: "The severe drop on Monday was driven in part by a technicality of the global oil market. Oil is traded on its future price and May futures contracts are due to expire on Tuesday. Traders were keen to offload those holdings to avoid having to take delivery of the oil and incur storage costs." But I think it's pretty irresponsible journalism to kick off the article the way they did, and imply that producers are paying you to take their oil today.

User23 6y ago
> cost of storing that oil is getting really high If anything, this is a wild understatement. Each contract represents 1000 barrels of toxic waste. You can't just have that stored in a shed or something. And all the commercial regulation compliant storage is gone. I'd be willing to bet you will have a hard time even finding a tanker truck to take it to a buyer, since the tanker owners themselves are going to be using those trailers as temporary storage facilities. Anyone stuck taking delivery of barrels right now is in for a world of hurt. The legal fees alone are going to be ruinous.
- RobLach 6y ago
  In the USA at least, EPA enforcement has been drastically relaxed to allow a bit more freedom in regard to this issue in exchange of public safety and environmental stability. I wouldn't be surprised if someone doesn't see the opportunity to just dump oil from their tankers to take on an additional lucrative storage contract from a speculator caught off guard. ELPC just released this report for example claiming the number of facilities regulated by the EPA that are out of compliance have doubled in the last year. http://elpc.org/wp-content/uploads/2020/04/Region5Report_FINAL_April2020.pdf http://elpc.org/wp-content/uploads/2020/04/Region5Report_FIN...
  - jacobolus 6y ago
    > EPA enforcement has been drastically relaxed to allow a bit more freedom EPA enforcement has been relaxed because the toxic sludge dumpers with influence in the Trump Administration have always wanted to gut environmental regulations and avoid legal liability for giving their neighbors cancer, but now they have a convenient excuse.
- jliptzin 6y ago
  Forgive me if this is a stupid question but they can’t hold a gun to your head to force you to take the oil, right? Can’t you just refuse the delivery if you have nowhere to store it? Is there language in the contract for this kind of situation?
  - User23 6y ago
    That's not a stupid question it's an excellent one. If you don't take delivery you're in breach of contract. The penalties for that are going to depend on how the judicial process works out. This has never happened before, so I don't know how it will play out other than that it's going to be wildly messy. Probably far messier than anyone, myself included, is imagining.
    - SilasX 6y ago
      >That's not a stupid question it's an excellent one. If you don't take delivery you're in breach of contract. The penalties for that are going to depend on how the judicial process works out. That sounds incorrect. The whole point of having standardized, commodified units trading on organized exchanges is that you don’t have to reinvent the dispute-resolution wheel — or turn it over to super slow courts — for every foreseeable thing that can go wrong. So there should be a specific procedure and penalty you can look up. I asked the same question and got this answer that seems more correct and along the lines of my intuition, that the exchange holds it (or rather, directs others to home it) and bills your account for the cost: https://news.ycombinator.com/item?id=22929334 https://news.ycombinator.com/item?id=22929334
      - User23 6y ago
        The contract[1] assumes that Cushing has storage capacity. IANAL so I don't know how material that will be, but I continue to expect that lawyers will get involved and this will be a mess. [1] https://www.cmegroup.com/content/dam/cmegroup/rulebook/NYMEX/2/200.pdf https://www.cmegroup.com/content/dam/cmegroup/rulebook/NYMEX...
    - markdown 6y ago
- ClumsyPilot 6y ago
  This is a very good point - unlike tree logs or something, you can't just pile up oil. I dont even think youd be allowed to burn unrefined oil in mass.s
- deleted 6y ago
  [deleted]
- gwbas1c 6y ago
  > since the tanker owners themselves are going to be using those trailers as temporary storage facilities. Can the tanker just take the oil it's holding to the buyer, then replace it at profit? Example: Tanker is paid to hold Joe's oil Bob needs a tanker to bring oil to Matt. Tanker brings Joe's oil to Matt, and replaces the oil at a profit.
PierceJoy 6y ago
But does this mean that the contract holder is paying someone to take their oil in the future? It feels significant that someone in the chain from producer to consumer is now paying to have someone take their product.
mike_d 6y ago
> Producers already got paid for this production a long time ago Nothing requires a broker to be involved. Drillers can sell futures to "get paid now" for future production, and likely did so to cover expenses in these chaotic times. If they issued a contract for 1000 barrels on the 1st of the month, produced that 1000 barrels on the 10th, and have an unsold contract on the last day of the month - they are screwed.
- foota 6y ago
  I'm confused, isn't issuing a contract bearish? They would be able to make a large profit but closing their position, wouldn't they?
  - MiroF 6y ago
    Issuing a contract is bearish or bullish depending on the price.
scarmig 6y ago
It reminds me of a funny story in Options, Futures, and Other Derivatives, where some newbie trader mistakenly bought a contract on live cattle futures to close out a long position. The trader spent a couple weeks traveling thousands of miles and figuring out housing and food for hundreds of cattle until a buyer for them could be found.
- 9nGQluzmnq3M 6y ago
  There's another version of this involving a whole lotta coal: https://thedailywtf.com/articles/special-delivery https://thedailywtf.com/articles/special-delivery
- deleted 6y ago
  [deleted]
EGreg 6y ago
Well to be honest, although it may not be true for oil, it can definitely be true briefly for electricity, because it’s use it or lose it. Battery storage is still in its infancy. Negative prices are definitely a thing when you can’t stop production and all of a sudden storage or middlemen are over capacity. LOOK AT WHAT IS HAPPENING right now in the US food chain! The farmers have to euthanize cattle rather than sell them because the price they get is lower than upkeep. Yet the price of meat at the supermarket is going up and up. What’s going on? Well, the processing plants have shut because they’re sending employees home if anyone is infected, and so the capacity of the middlemen drops. And boom, there is a huge inefficiency now. Someone in congress is working on a bill to let the farmers and supermarkets disintermediate... as usual, decentralization to the rescue.
Waterluvian 6y ago
What happens if you just literally don't come pick up your oil? Lawsuit?
csomar 6y ago
> Producers already got paid for this production a long time ago It's a future market for the public. You don't know which side you are trading with (trader or producer) but they are all trading at all times even if they are not transacting. Here is an example: Let's say you are a producer that a sold a future contract a long time ago at $25. You have the opportunity to buy that contract again today at -25$ and close your position. You have no oil to deliver + you made $50 per barrel more than what oil is trading at in Europe. Given that we can conclude: - Big producers are refusing the close positions to keep prices down. (or maybe they have a legitimate reason why they want to deliver their contracts?) - The market temporarily dipped because of leveraged trading. Traders were a sleep/slow to react. (they don't have automated bots?) - This price range (maybe not -25$ but maybe $5-0) is the real price of oil for these few days.
- ThrustVectoring 6y ago
  > Big producers are refusing the close positions to keep prices down. (or maybe they have a legitimate reason why they want to deliver their contracts?) They have legitimate reasons why they want to deliver their contracts. Crude oil is highly toxic, they only have so much storage available, and shutting down wells incurs significant costs. If they don't buy back their short futures position at -$25/barrel, that means shutting down costs them at least $25 per barrel no-longer-produced.
rco8786 6y ago
How is this not a good time to buy oil. Assuming a 5+ year time horizon.
- lumost 6y ago
  It's a physical asset, with strict environmentally regulated storage requirements. Holding it speculatively for 5+ years requires that the speculation will pay in excess of the storage fees compounded at a reasonable risk adjusted rate of return for the 5 year duration. This is a great deal if you happen to own cheap oil storage, I wouldn't be surprised if the main buyers of these contracts are the storage companies.

User23 6y ago

> cost of storing that oil is getting really high If anything, this is a wild understatement. Each contract represents 1000 barrels of toxic waste. You can't just have that stored in a shed or something. And all the commercial regulation compliant storage is gone. I'd be willing to bet you will have a hard time even finding a tanker truck to take it to a buyer, since the tanker owners themselves are going to be using those trailers as temporary storage facilities. Anyone stuck taking delivery of barrels right now is in for a world of hurt. The legal fees alone are going to be ruinous.

RobLach 6y ago
In the USA at least, EPA enforcement has been drastically relaxed to allow a bit more freedom in regard to this issue in exchange of public safety and environmental stability. I wouldn't be surprised if someone doesn't see the opportunity to just dump oil from their tankers to take on an additional lucrative storage contract from a speculator caught off guard. ELPC just released this report for example claiming the number of facilities regulated by the EPA that are out of compliance have doubled in the last year. http://elpc.org/wp-content/uploads/2020/04/Region5Report_FINAL_April2020.pdf http://elpc.org/wp-content/uploads/2020/04/Region5Report_FIN...
- jacobolus 6y ago
  > EPA enforcement has been drastically relaxed to allow a bit more freedom EPA enforcement has been relaxed because the toxic sludge dumpers with influence in the Trump Administration have always wanted to gut environmental regulations and avoid legal liability for giving their neighbors cancer, but now they have a convenient excuse.
jliptzin 6y ago
Forgive me if this is a stupid question but they can’t hold a gun to your head to force you to take the oil, right? Can’t you just refuse the delivery if you have nowhere to store it? Is there language in the contract for this kind of situation?
- User23 6y ago
  That's not a stupid question it's an excellent one. If you don't take delivery you're in breach of contract. The penalties for that are going to depend on how the judicial process works out. This has never happened before, so I don't know how it will play out other than that it's going to be wildly messy. Probably far messier than anyone, myself included, is imagining.
  - SilasX 6y ago
    >That's not a stupid question it's an excellent one. If you don't take delivery you're in breach of contract. The penalties for that are going to depend on how the judicial process works out. That sounds incorrect. The whole point of having standardized, commodified units trading on organized exchanges is that you don’t have to reinvent the dispute-resolution wheel — or turn it over to super slow courts — for every foreseeable thing that can go wrong. So there should be a specific procedure and penalty you can look up. I asked the same question and got this answer that seems more correct and along the lines of my intuition, that the exchange holds it (or rather, directs others to home it) and bills your account for the cost: https://news.ycombinator.com/item?id=22929334 https://news.ycombinator.com/item?id=22929334
    - User23 6y ago
      The contract[1] assumes that Cushing has storage capacity. IANAL so I don't know how material that will be, but I continue to expect that lawyers will get involved and this will be a mess. [1] https://www.cmegroup.com/content/dam/cmegroup/rulebook/NYMEX/2/200.pdf https://www.cmegroup.com/content/dam/cmegroup/rulebook/NYMEX...
  - markdown 6y ago
ClumsyPilot 6y ago
This is a very good point - unlike tree logs or something, you can't just pile up oil. I dont even think youd be allowed to burn unrefined oil in mass.s
deleted 6y ago
[deleted]
gwbas1c 6y ago
> since the tanker owners themselves are going to be using those trailers as temporary storage facilities. Can the tanker just take the oil it's holding to the buyer, then replace it at profit? Example: Tanker is paid to hold Joe's oil Bob needs a tanker to bring oil to Matt. Tanker brings Joe's oil to Matt, and replaces the oil at a profit.

PierceJoy 6y ago

But does this mean that the contract holder is paying someone to take their oil in the future? It feels significant that someone in the chain from producer to consumer is now paying to have someone take their product.

mike_d 6y ago

> Producers already got paid for this production a long time ago Nothing requires a broker to be involved. Drillers can sell futures to "get paid now" for future production, and likely did so to cover expenses in these chaotic times. If they issued a contract for 1000 barrels on the 1st of the month, produced that 1000 barrels on the 10th, and have an unsold contract on the last day of the month - they are screwed.

foota 6y ago
I'm confused, isn't issuing a contract bearish? They would be able to make a large profit but closing their position, wouldn't they?
- MiroF 6y ago
  Issuing a contract is bearish or bullish depending on the price.

scarmig 6y ago

It reminds me of a funny story in Options, Futures, and Other Derivatives, where some newbie trader mistakenly bought a contract on live cattle futures to close out a long position. The trader spent a couple weeks traveling thousands of miles and figuring out housing and food for hundreds of cattle until a buyer for them could be found.

9nGQluzmnq3M 6y ago
There's another version of this involving a whole lotta coal: https://thedailywtf.com/articles/special-delivery https://thedailywtf.com/articles/special-delivery
deleted 6y ago
[deleted]

EGreg 6y ago

Well to be honest, although it may not be true for oil, it can definitely be true briefly for electricity, because it’s use it or lose it. Battery storage is still in its infancy. Negative prices are definitely a thing when you can’t stop production and all of a sudden storage or middlemen are over capacity. LOOK AT WHAT IS HAPPENING right now in the US food chain! The farmers have to euthanize cattle rather than sell them because the price they get is lower than upkeep. Yet the price of meat at the supermarket is going up and up. What’s going on? Well, the processing plants have shut because they’re sending employees home if anyone is infected, and so the capacity of the middlemen drops. And boom, there is a huge inefficiency now. Someone in congress is working on a bill to let the farmers and supermarkets disintermediate... as usual, decentralization to the rescue.

Waterluvian 6y ago

What happens if you just literally don't come pick up your oil? Lawsuit?

csomar 6y ago

> Producers already got paid for this production a long time ago It's a future market for the public. You don't know which side you are trading with (trader or producer) but they are all trading at all times even if they are not transacting. Here is an example: Let's say you are a producer that a sold a future contract a long time ago at $25. You have the opportunity to buy that contract again today at -25$ and close your position. You have no oil to deliver + you made $50 per barrel more than what oil is trading at in Europe. Given that we can conclude: - Big producers are refusing the close positions to keep prices down. (or maybe they have a legitimate reason why they want to deliver their contracts?) - The market temporarily dipped because of leveraged trading. Traders were a sleep/slow to react. (they don't have automated bots?) - This price range (maybe not -25$ but maybe $5-0) is the real price of oil for these few days.

ThrustVectoring 6y ago
> Big producers are refusing the close positions to keep prices down. (or maybe they have a legitimate reason why they want to deliver their contracts?) They have legitimate reasons why they want to deliver their contracts. Crude oil is highly toxic, they only have so much storage available, and shutting down wells incurs significant costs. If they don't buy back their short futures position at -$25/barrel, that means shutting down costs them at least $25 per barrel no-longer-produced.

rco8786 6y ago

How is this not a good time to buy oil. Assuming a 5+ year time horizon.

lumost 6y ago
It's a physical asset, with strict environmentally regulated storage requirements. Holding it speculatively for 5+ years requires that the speculation will pay in excess of the storage fees compounded at a reasonable risk adjusted rate of return for the 5 year duration. This is a great deal if you happen to own cheap oil storage, I wouldn't be surprised if the main buyers of these contracts are the storage companies.