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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 ha

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 7y 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 7y 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 7y 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 7y ago
  At the risk of sounding stupid, I have to ask... Would it be possible to simply pump the oil back into the ground wherever the closest oil field is?
  - saagarjha 7y ago
    That sounds like it'd get the EPA involved if you just dumped it, and I would expect that putting oil into an actual oil well is not easy.
  - adventured 7y ago
    In an arrangement with the US Government it could be put into the ground, elsewhere. Doing it without state permission would be an entirely different matter however. I'm not aware of any very large, privately owned underground storage caverns (such that they could make a dent in absorbing the over-supply). This is being discussed: "The U.S. Energy Department is negotiating with nine companies to rent about 23 million barrels of oil storage capacity in its Strategic Petroleum Reserve as part of a Trump administration bid to help drain the country’s growing glut of crude." https://www.worldoil.com/news/2020/4/14/doe-working-to-lease-out-23-mmbbl-of-strategic-petroleum-reserve-capacity https://www.worldoil.com/news/2020/4/14/doe-working-to-lease... Here is what the US Strategic Petroleum Reserve looks like (it can absorb some of our over-supply briefly): > Four underground salt caverns on the coast of the Gulf of Mexico store the oil. That's a central location. The oil can be distributed to nearly half of the U.S. oil refineries either through interstate pipelines or via barges. It only takes 13 days for the oil to enter the U.S. market from the time the president first gives the order. > There are two cavern locations in Texas. As of September 30, 2018, Bryan Mound held 235.3 million barrels in 20 caverns. Big Hill held 153.4 million barrels in 14 caverns. The other two are in Louisiana. West Hackberry held 199.5 million barrels in 22 caverns. Bayou Choctaw held 71.88 million barrels in 6 caverns. > The maximum capacity of all four caverns is 727 million barrels. There is also a good FAQ on it: https://www.energy.gov/fe/services/petroleum-reserves/strategic-petroleum-reserve/spr-quick-facts-and-faqs https://www.energy.gov/fe/services/petroleum-reserves/strate...
    - firebird84 7y ago
- alasdair_ 7y ago
  I'm surprised that someone didn't just corral some bankruptcy-proof people together and offer them some cash each to be the holder of record.
  - ThrustVectoring 7y ago
    The position is collateralized, all this does is lose you money.
fennecfoxen 7y ago
This sort of refusal would likely has contractual penalties associated with it. Drillers and pipeline operators can't just shut down infrastructure by flipping a switch like it's nothing; it costs real money to perform shutdown procedures or restart pipeline pumps.
- paxys 7y ago
  I bet all the lawyers who put such clauses in futures contracts are feeling pretty smug right now. I can imagine an oil producer going "Why on earth do we need to put this in the contract? Of course they'll accept delivery. If they don't then that's great for us."
  - hunter2_ 7y ago
    Eh, they probably thought it (however unlikely) could happen for reasons other than a pandemic. Like unprecedented green energy incentives leading to everyone suddenly driving an EV.
    - fennecfoxen 7y ago
      That example is a bit implausible. This is only a problem when oil prices fall very low very quickly. Manufacturing constraints prevent mass EV adoption on those timescales. On the other hand, people who draft contracts for big corporations get to talk to risk analysts and ask "if we agree to this, what might go wrong that causes us to lose money?" and write clauses that generally protect them from that risk.
    - paxys 7y ago
      That could happen over a span of decades or longer, not like 3 weeks.
    - RandomBacon 7y ago
      For most people it's going to be cheaper to continue to use or buy a used gasoline vehicle than it will be to buy a new electric vehicle.
    - 7y ago
tomerico 7y ago
It’s likely that they’d be held liable for the costs of storage for the oil they did not take.
mike_d 7y ago
In this sense "barrel" is a unit of measure. The oil is physically in tanks in Oklahoma. When oil is delivered it stays in the same tank, but the ledger for the tank contents are updated. Once delivery is made you are now on the hook for the storage costs - which are going sky high because there is no available storage inventory. You can default on your obligations to the storage company, but they will sell off whatever oil you hold to cover debts and then sue you for the rest. When the market is functioning correctly you end up paying for a few days of storage while the oil is diverted to a pipeline where you can extract it, or it is offloaded on to your train/truck/tanker/etc.
anigbrowl 7y ago
Well, you'll be on the hook for the storage costs until you arrange somewhere for it to go, so in that sense, yes they can. Yeah, you can sell the oil to someone else in the future, but when? Meantime, you owe rent.
refurb 7y ago
Rejecting delivery would be no different than any other contractual arrangement, like buying a car or selling stock. If you decide to not follow the contract, you'll be sued.
bouncycastle 7y ago
I believe you will get charged "demurrage" if you can't unload the oil in time. https://en.wikipedia.org/wiki/Demurrage https://en.wikipedia.org/wiki/Demurrage
ThrustVectoring 7y ago
You are required to post cash collateral in order to take out a futures position. It's calibrated so that the cost of abandoning that collateral is large enough to basically be a gun to your head. Furthermore, when the price of the contract moves, they mark-to-market your collateral and credit/debit you your daily gains or losses. Basically, the people holding the contracts have to either sell at a negative price to cover, pay to take delivery, or give up cash collateral that's worth even more money than the previous choices.

User23 7y 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 7y 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 7y 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 7y ago
At the risk of sounding stupid, I have to ask... Would it be possible to simply pump the oil back into the ground wherever the closest oil field is?
- saagarjha 7y ago
  That sounds like it'd get the EPA involved if you just dumped it, and I would expect that putting oil into an actual oil well is not easy.
- adventured 7y ago
  In an arrangement with the US Government it could be put into the ground, elsewhere. Doing it without state permission would be an entirely different matter however. I'm not aware of any very large, privately owned underground storage caverns (such that they could make a dent in absorbing the over-supply). This is being discussed: "The U.S. Energy Department is negotiating with nine companies to rent about 23 million barrels of oil storage capacity in its Strategic Petroleum Reserve as part of a Trump administration bid to help drain the country’s growing glut of crude." https://www.worldoil.com/news/2020/4/14/doe-working-to-lease-out-23-mmbbl-of-strategic-petroleum-reserve-capacity https://www.worldoil.com/news/2020/4/14/doe-working-to-lease... Here is what the US Strategic Petroleum Reserve looks like (it can absorb some of our over-supply briefly): > Four underground salt caverns on the coast of the Gulf of Mexico store the oil. That's a central location. The oil can be distributed to nearly half of the U.S. oil refineries either through interstate pipelines or via barges. It only takes 13 days for the oil to enter the U.S. market from the time the president first gives the order. > There are two cavern locations in Texas. As of September 30, 2018, Bryan Mound held 235.3 million barrels in 20 caverns. Big Hill held 153.4 million barrels in 14 caverns. The other two are in Louisiana. West Hackberry held 199.5 million barrels in 22 caverns. Bayou Choctaw held 71.88 million barrels in 6 caverns. > The maximum capacity of all four caverns is 727 million barrels. There is also a good FAQ on it: https://www.energy.gov/fe/services/petroleum-reserves/strategic-petroleum-reserve/spr-quick-facts-and-faqs https://www.energy.gov/fe/services/petroleum-reserves/strate...
  - firebird84 7y ago
alasdair_ 7y ago
I'm surprised that someone didn't just corral some bankruptcy-proof people together and offer them some cash each to be the holder of record.
- ThrustVectoring 7y ago
  The position is collateralized, all this does is lose you money.

fennecfoxen 7y ago

This sort of refusal would likely has contractual penalties associated with it. Drillers and pipeline operators can't just shut down infrastructure by flipping a switch like it's nothing; it costs real money to perform shutdown procedures or restart pipeline pumps.

paxys 7y ago
I bet all the lawyers who put such clauses in futures contracts are feeling pretty smug right now. I can imagine an oil producer going "Why on earth do we need to put this in the contract? Of course they'll accept delivery. If they don't then that's great for us."
- hunter2_ 7y ago
  Eh, they probably thought it (however unlikely) could happen for reasons other than a pandemic. Like unprecedented green energy incentives leading to everyone suddenly driving an EV.
  - fennecfoxen 7y ago
    That example is a bit implausible. This is only a problem when oil prices fall very low very quickly. Manufacturing constraints prevent mass EV adoption on those timescales. On the other hand, people who draft contracts for big corporations get to talk to risk analysts and ask "if we agree to this, what might go wrong that causes us to lose money?" and write clauses that generally protect them from that risk.
  - paxys 7y ago
    That could happen over a span of decades or longer, not like 3 weeks.
  - RandomBacon 7y ago
    For most people it's going to be cheaper to continue to use or buy a used gasoline vehicle than it will be to buy a new electric vehicle.
  - 7y ago

tomerico 7y ago

It’s likely that they’d be held liable for the costs of storage for the oil they did not take.

mike_d 7y ago

In this sense "barrel" is a unit of measure. The oil is physically in tanks in Oklahoma. When oil is delivered it stays in the same tank, but the ledger for the tank contents are updated. Once delivery is made you are now on the hook for the storage costs - which are going sky high because there is no available storage inventory. You can default on your obligations to the storage company, but they will sell off whatever oil you hold to cover debts and then sue you for the rest. When the market is functioning correctly you end up paying for a few days of storage while the oil is diverted to a pipeline where you can extract it, or it is offloaded on to your train/truck/tanker/etc.

anigbrowl 7y ago

Well, you'll be on the hook for the storage costs until you arrange somewhere for it to go, so in that sense, yes they can. Yeah, you can sell the oil to someone else in the future, but when? Meantime, you owe rent.

refurb 7y ago

Rejecting delivery would be no different than any other contractual arrangement, like buying a car or selling stock. If you decide to not follow the contract, you'll be sued.

bouncycastle 7y ago

I believe you will get charged "demurrage" if you can't unload the oil in time. https://en.wikipedia.org/wiki/Demurrage https://en.wikipedia.org/wiki/Demurrage

ThrustVectoring 7y ago

You are required to post cash collateral in order to take out a futures position. It's calibrated so that the cost of abandoning that collateral is large enough to basically be a gun to your head. Furthermore, when the price of the contract moves, they mark-to-market your collateral and credit/debit you your daily gains or losses. Basically, the people holding the contracts have to either sell at a negative price to cover, pay to take delivery, or give up cash collateral that's worth even more money than the previous choices.