Originally I had planned to pursue geology as a career, and studied it at college. In those days there was still a significant element of the course which concerned hand specimens. Mostly rocks and minerals, but also an impressive display of different crude oils from around the world. High or low sulphur, viscosity, density. Uncapping the small tubes would stink up the whole room pretty quickly.
Yes many futures are not "cash settled" but settled in the actual commodity.
This is why in rare occasions the price of a thing goes negative because trading in that thing you are contractually obligated to take delivery and people trying to unload that obligation sometimes can't find buyers until they are paid to take delivery. It happens when nobody really wants to buy a thing and there is no capacity left to store or ship. When you buy a futures contract and you don't want delivery you have to sell it to close your position, and rarely you have to give people large sums of money so you can close.
In 2020 some Oil futures were negative at close, which has one obvious effect (if you're stuck holding the bag you're paying to store all this oil despite it being, at least temporarily, worthless) but also messes up the ETFs.
Suppose my actual oil futures go from $800k to $900k, the ideal ETF is trying to ensure that $800k also turns into $900k just as if its investors were in actual oil futures. But these aren't futures and don't result in delivery - so critically when real oil futures blow up and that $900k turns into -$1M because the global economy had a heart attack the ETF cannot be worth -$1M as it's just paper and I don't have to pay you one cent.
For the ETFs this means a negative exposure for the operator - they're eating unlimited downside but can't pass that on to their customers, and for a blip like 2020 that's survivable (if you're well capitalised) but longer term it would be fatal.
> Yes many futures are not "cash settled" but settled in the actual commodity.
This, in many ways is a ridiculous sentence which shows what is wrong with the futures market. Futures are contracts for the supply of commodities. All futures should be settled by the actual commodity! That we have got to a situation where the vast majority of futures contracts are just 2nd order bets on the price of thing rather than delivery of the thing is non optimal.
She’s an entertaining writer & co anchors a podcast called
Odd Lots, for those unaware. Entertaining and informative on various niches of money & markets.
Futures contracts are actually somewhat interesting in how fully they are specified. If you want to see how Light Sweet Crude Oil Futures are delivered, that's covered in the NYMEX Rulebook, Chapter 200:
Originally I had planned to pursue geology as a career, and studied it at college. In those days there was still a significant element of the course which concerned hand specimens. Mostly rocks and minerals, but also an impressive display of different crude oils from around the world. High or low sulphur, viscosity, density. Uncapping the small tubes would stink up the whole room pretty quickly.
Planet Money had a wonderful series of episodes where they did exactly this a few years ago.
https://www.npr.org/sections/money/2016/08/26/491342091/plan...
They traced the path of their barrel from purchase, to production, to refining, to the sale of the various hydrocarbon products.
It's a great listen.
Did they pay extra for the barrel itself? Surely that steel doesn't come for free.
You can sell the barrel after you are done
Didn't the price of the actual barrel became more onerous than the product itself during covid?
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I remember this from 2015! (187 comments): https://news.ycombinator.com/item?id=10499297
Came up again in 2020 (157 comments): https://news.ycombinator.com/item?id=22924929
This is right up there with the futures trader who accidentally ordered a barge full of coal delivered to his manhattan office.
Yes many futures are not "cash settled" but settled in the actual commodity.
This is why in rare occasions the price of a thing goes negative because trading in that thing you are contractually obligated to take delivery and people trying to unload that obligation sometimes can't find buyers until they are paid to take delivery. It happens when nobody really wants to buy a thing and there is no capacity left to store or ship. When you buy a futures contract and you don't want delivery you have to sell it to close your position, and rarely you have to give people large sums of money so you can close.
In 2020 some Oil futures were negative at close, which has one obvious effect (if you're stuck holding the bag you're paying to store all this oil despite it being, at least temporarily, worthless) but also messes up the ETFs.
Suppose my actual oil futures go from $800k to $900k, the ideal ETF is trying to ensure that $800k also turns into $900k just as if its investors were in actual oil futures. But these aren't futures and don't result in delivery - so critically when real oil futures blow up and that $900k turns into -$1M because the global economy had a heart attack the ETF cannot be worth -$1M as it's just paper and I don't have to pay you one cent.
For the ETFs this means a negative exposure for the operator - they're eating unlimited downside but can't pass that on to their customers, and for a blip like 2020 that's survivable (if you're well capitalised) but longer term it would be fatal.
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> Yes many futures are not "cash settled" but settled in the actual commodity.
This, in many ways is a ridiculous sentence which shows what is wrong with the futures market. Futures are contracts for the supply of commodities. All futures should be settled by the actual commodity! That we have got to a situation where the vast majority of futures contracts are just 2nd order bets on the price of thing rather than delivery of the thing is non optimal.
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I would love a link to that article lol
This is where I read it: https://thedailywtf.com/articles/Special-Delivery
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I want to buy pork bellies and frozen concentrated orange juice.
Randolph, I will wager you one dollar that an LLM, if put in a fine suit, could do just a good a job as any of our traders.
"Mr Duke your brother is unwell!"
"F*K HIM!!!!"
https://archive.is/SKAKk
She’s an entertaining writer & co anchors a podcast called Odd Lots, for those unaware. Entertaining and informative on various niches of money & markets.
The Gang Solves the Gas Crisis.
Quirky and laugh out loud funny. Thank you for the post.
Futures contracts are actually somewhat interesting in how fully they are specified. If you want to see how Light Sweet Crude Oil Futures are delivered, that's covered in the NYMEX Rulebook, Chapter 200:
https://www.cmegroup.com/rulebook/NYMEX/2/200.pdf
This level of standardisation is indeed what makes them so liquid and useful!
Oil is usually considered fungible.
Fungible is a word that sounds weird and I don’t get to say often enough.
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