I buy ~200,000 physical barrels of oil for 2 refineries every single day. The quantity is mind blowing and Im not even a particularly large oil trader in the grand scheme of things. The world drinks ~104 million barrels per day or around 1200 barrels a second. An olympic swimming pool holds ~15000 barrels of volume. In Canada, we trade in "cubes" which are M3. Each M3 is ~6.29287 barrels of oil. I do my monthly planning in km3.
I'm happy to answer any industry questions in case anyone has any. It is a fascinating job.
It still blows my mind to this day. Every time I "purchase" a ship full of crude it blows my mind the level of infrastructure to make it happen. Maybe I'll load an Aframax full of 500kbbl or issue my crude buy plan in km3. I always try and look up the ships and track the vessel movements and sea conditions bc there are teams of people on those ships working them. Meanwhile I just picked up the phone and made it happen... with like $40m bucks. It is a wild thing that never becomes normal.
Just think about a what a km3 of oil would look like. It is nuts. then realize that we buy and sell in 10,000m3 pipe batches with plenty of liquidity.
The street parlance in commodity trading tends to be more about where you are trading on the (time) curve on what is called “spot”. Ie. if you are buying near delivery (prompt month or inline) that’s often referred to as spot.
But I’m trading physical forward contracts technically and it depends on the specific grade how far forward that is.
The physical oil market trades in monthly cycles. On May 1 I’ll be trading forward contracts for physical oil to inject in June (which will transit for about month and land in July). For a liquid grade like WCS (Canadian heavy) I could technically buy phys “injectors” down the curve a good ways. Monthly, quarterly out about year.
Once a barrel is injected, schedulers manage swaps around physical ops with counterparties to ensure our tanks don’t overflow and we have a nice rateable supply. If a swap won’t cut it at that point, and I’m physically short to refinery demand or longer than I can hold, I can buy or sell distressed inline barrels (already in transit) with lower liquidity.
These aren’t futures though. Futures are standard volumes and typically settled financially. WTI futures for instance are typically not held to delivery, though you can deliver it into Cush if you have tankage. The paper market vastly, vastly exceeds the physical real barrels flowing though, so most of these are simply closed out bets/hedges.
Surely by pipeline or ship I think. When he says "physical barrels of oil" I believe he means he's actually buying the oil itself (as opposed to buying a contract or derivative of some sort). I don't think he means that the crude oil is actually arriving in individual barrels. But I could be wrong.
Yeah I work for a large oil company. Companies like BP, Shell, Marathon, Valero etc all have oil traders/marketers doing refinery supply. There are also intermediaries like traders at midstream companies, producers (selling the oil), or trading shops like Trafigura, Glencore, Mercuria who are slowly accruing more physical assets. Some hedge funds operate in the phys space as well.
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.
As good as the DailyWTF story is, it's not real. Coal is unfortunately cash settled.
Even oil, which is physically delivered settles physically in discrete locations. It would be pretty funny if someone delivered tankers full of oil to your office though lol.
As soon as I read this headline, I was hoping someone in the comments was going to link to “Special Delivery”! That one and “Complicator’s Gloves” are probably the most memorable!
> Over the span of a few hours one day in April 2020, a guy called Cuddles and eight of his pals from the freewheeling world of London’s commodities markets rode oil’s crash to a $660 million profit. Now regulators are scrutinizing their once-in-a-lifetime trade.
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:
I never really understood the "with delivery in Cushing, Oklahoma" thing, and the Delivery section on page 3 doesn't make it too much clearer.
Surely there are people trading in these contracts that... don't want their oil delivered to Cushing? The Delivery section makes it sound like maybe it can be delivered somewhere else if the buyer and seller agree, maybe?
And Wikipedia does make it sound like Cushing really can be a bottleneck: https://en.wikipedia.org/wiki/Oil_industry_in_Cushing,_Oklah... But... how? It seems like such a bizarre setup to literally require all the oil to come to this one specific town, I assume I'm missing something obvious?
> Surely there are people trading in these contracts that... don't want their oil delivered to Cushing?
A big-enough buyer will know how to get oil from Cushing to their facility, often by pipeline. One who doesn't really want oil in Cushing is likely to close out their futures trade before the settlement date, treating it like a purely financial transaction.
> It seems like such a bizarre setup to literally require all the oil to come to this one specific town, I assume I'm missing something obvious?
Futures contracts need to be based on the price of something, but the price of a physical good depends on location. Delivery of a barrel of crude to the South Pole would be much, much more expensive – and more variable – than delivery to a big oil terminal. Contracts for physical goods need some kind of agreed-upon reference point, even if most of the time things get financially settled without delivery.
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.
I think a lot of that strong smell is the mercaptans (organosulfur compounds) which are very pungent. Funnily enough that's what gets added back in to natural gas so people can smell if there is a leak.
She’s an entertaining writer & co anchors a podcast called
Odd Lots, for those unaware. Entertaining and informative on various niches of money & markets.
Pure lack of initiative and stuck in a retail mentality.
There are 10's of thousands of privatly owned wells, and countless trucks and shipping hubs.
It is EXACTLY the same situation with, oh, lets pick, wheat, and a "bushel" whatever the fuck that is, I wanted one, and got one, and corn by the ton, and fuel oil, and coal by the ton, loaded onto my 1 ton truck, drive up to the fucking place
and get some.......they dont realy want to sell small quantities....but they will.....mainly they are worried about civilians getting hurt in what are purely industrial environments, but standing y ground and bieng patient and respectfull has gotten me through many gates, loaded, and gone.......often it's the secretary/receptionist who decides, and pulls out a cash slip, then.the rest just happens, sometimes it's the plant manager, who does a hand wave and points after determining that it will be ok, but all in all, it's the same for everything, just find the person
who can say yes and ask.
Do you have an idea what one bbl of crude oil weights? Like bowling balls, it depends on the quality of the crude. 55gal @ 8.5lbs/gal to 11.4lbs/gal? 450lbs to 625lbs. Forklifts only.
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
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Barrel is a unit of measure, like gallon.
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I tried to buy a foot of yarn but no one offered it packaged in feet
Didn't the price of the actual barrel became more onerous than the product itself during covid?
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Makes me sad hearing this. Planet Money fell off so hard in the years after this
I buy ~200,000 physical barrels of oil for 2 refineries every single day. The quantity is mind blowing and Im not even a particularly large oil trader in the grand scheme of things. The world drinks ~104 million barrels per day or around 1200 barrels a second. An olympic swimming pool holds ~15000 barrels of volume. In Canada, we trade in "cubes" which are M3. Each M3 is ~6.29287 barrels of oil. I do my monthly planning in km3.
I'm happy to answer any industry questions in case anyone has any. It is a fascinating job.
I find it nearly incomprehensible that so much oil exists. That's ~7k Olympic swimming pools of oil every day. This has been going on for decades.
It still blows my mind to this day. Every time I "purchase" a ship full of crude it blows my mind the level of infrastructure to make it happen. Maybe I'll load an Aframax full of 500kbbl or issue my crude buy plan in km3. I always try and look up the ships and track the vessel movements and sea conditions bc there are teams of people on those ships working them. Meanwhile I just picked up the phone and made it happen... with like $40m bucks. It is a wild thing that never becomes normal.
Just think about a what a km3 of oil would look like. It is nuts. then realize that we buy and sell in 10,000m3 pipe batches with plenty of liquidity.
Do you actually buy them on the spot market or buy them as futures?
The street parlance in commodity trading tends to be more about where you are trading on the (time) curve on what is called “spot”. Ie. if you are buying near delivery (prompt month or inline) that’s often referred to as spot.
But I’m trading physical forward contracts technically and it depends on the specific grade how far forward that is.
The physical oil market trades in monthly cycles. On May 1 I’ll be trading forward contracts for physical oil to inject in June (which will transit for about month and land in July). For a liquid grade like WCS (Canadian heavy) I could technically buy phys “injectors” down the curve a good ways. Monthly, quarterly out about year.
Once a barrel is injected, schedulers manage swaps around physical ops with counterparties to ensure our tanks don’t overflow and we have a nice rateable supply. If a swap won’t cut it at that point, and I’m physically short to refinery demand or longer than I can hold, I can buy or sell distressed inline barrels (already in transit) with lower liquidity.
These aren’t futures though. Futures are standard volumes and typically settled financially. WTI futures for instance are typically not held to delivery, though you can deliver it into Cush if you have tankage. The paper market vastly, vastly exceeds the physical real barrels flowing though, so most of these are simply closed out bets/hedges.
How do you take delivery of such huge volumes? Rail?
Surely by pipeline or ship I think. When he says "physical barrels of oil" I believe he means he's actually buying the oil itself (as opposed to buying a contract or derivative of some sort). I don't think he means that the crude oil is actually arriving in individual barrels. But I could be wrong.
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Pipeline and ship. We've done some rail in the past, but it is a last resort when basis spreads are wide.
The oil is pumped off of ships or straight off the pipeline into our refinery tankage.
Do refineries employ people like you directly? Or do you work for a downstream supplier of some kind? Curious what the supply chain looks like.
Yeah I work for a large oil company. Companies like BP, Shell, Marathon, Valero etc all have oil traders/marketers doing refinery supply. There are also intermediaries like traders at midstream companies, producers (selling the oil), or trading shops like Trafigura, Glencore, Mercuria who are slowly accruing more physical assets. Some hedge funds operate in the phys space as well.
is a km3 1000 m3 or 1,000,000,000 m3?
to go from km to m you multiply by 1,000.
to go from km^2 to m^2 you multiply by 1,000^2.
to go from km^3 to m^3 you multiply by 1,000^3.
So 1km^3 is 1,000,000,000m^3
[dead]
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.
23 replies →
As good as the DailyWTF story is, it's not real. Coal is unfortunately cash settled.
Even oil, which is physically delivered settles physically in discrete locations. It would be pretty funny if someone delivered tankers full of oil to your office though lol.
As soon as I read this headline, I was hoping someone in the comments was going to link to “Special Delivery”! That one and “Complicator’s Gloves” are probably the most memorable!
Good job it wasn't a power future.
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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Somewhat related, from 2020, "The day oil was worth less than $0 — and nobody wanted it":
* https://www.cbc.ca/news/business/oil-negative-price-1.553899...
I vaguely remember som enterprising guys decided to buy some sort of storage tanks and then “buying” the oil while they still could, for a quick buck.
Bloomberg story on it:
> Over the span of a few hours one day in April 2020, a guy called Cuddles and eight of his pals from the freewheeling world of London’s commodities markets rode oil’s crash to a $660 million profit. Now regulators are scrutinizing their once-in-a-lifetime trade.
* https://www.youtube.com/watch?v=F7_WXUMFM_w (14m)
* http://archive.is/https://www.bloomberg.com/news/features/20...
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
I never really understood the "with delivery in Cushing, Oklahoma" thing, and the Delivery section on page 3 doesn't make it too much clearer.
Surely there are people trading in these contracts that... don't want their oil delivered to Cushing? The Delivery section makes it sound like maybe it can be delivered somewhere else if the buyer and seller agree, maybe?
And Wikipedia does make it sound like Cushing really can be a bottleneck: https://en.wikipedia.org/wiki/Oil_industry_in_Cushing,_Oklah... But... how? It seems like such a bizarre setup to literally require all the oil to come to this one specific town, I assume I'm missing something obvious?
> Surely there are people trading in these contracts that... don't want their oil delivered to Cushing?
A big-enough buyer will know how to get oil from Cushing to their facility, often by pipeline. One who doesn't really want oil in Cushing is likely to close out their futures trade before the settlement date, treating it like a purely financial transaction.
> It seems like such a bizarre setup to literally require all the oil to come to this one specific town, I assume I'm missing something obvious?
Futures contracts need to be based on the price of something, but the price of a physical good depends on location. Delivery of a barrel of crude to the South Pole would be much, much more expensive – and more variable – than delivery to a big oil terminal. Contracts for physical goods need some kind of agreed-upon reference point, even if most of the time things get financially settled without delivery.
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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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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.
I think a lot of that strong smell is the mercaptans (organosulfur compounds) which are very pungent. Funnily enough that's what gets added back in to natural gas so people can smell if there is a leak.
Probably hydrogen sulphide, the active ingredient in stink bombs.
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.
That was such a good movie. All the leads and even not so leads were at the top of their form.
"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.
https://www.bloomberg.com/oddlots
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
Pure lack of initiative and stuck in a retail mentality. There are 10's of thousands of privatly owned wells, and countless trucks and shipping hubs. It is EXACTLY the same situation with, oh, lets pick, wheat, and a "bushel" whatever the fuck that is, I wanted one, and got one, and corn by the ton, and fuel oil, and coal by the ton, loaded onto my 1 ton truck, drive up to the fucking place and get some.......they dont realy want to sell small quantities....but they will.....mainly they are worried about civilians getting hurt in what are purely industrial environments, but standing y ground and bieng patient and respectfull has gotten me through many gates, loaded, and gone.......often it's the secretary/receptionist who decides, and pulls out a cash slip, then.the rest just happens, sometimes it's the plant manager, who does a hand wave and points after determining that it will be ok, but all in all, it's the same for everything, just find the person who can say yes and ask.
The Toaster Project[1], where Thomas Thwaites tries to build a toaster from scratch also touches upon this subject. Fascinating read.
[0] https://www.thomasthwaites.com/the-toaster-project/
The Gang Solves the Gas Crisis.
I remember this, and it was hilarious.
Somewhat related is the tale of the commodities trade from DailyWTF that was unfortunately executed literally.
https://thedailywtf.com/articles/Special-Delivery
Do you have an idea what one bbl of crude oil weights? Like bowling balls, it depends on the quality of the crude. 55gal @ 8.5lbs/gal to 11.4lbs/gal? 450lbs to 625lbs. Forklifts only.
A standard (now) actual chemical drum holds 200L, which would be 200kg plus the weight of the barrel if filled with water. Oil is less dense.
Estimations are much easier with metric units.
There are special hand-powered machines for moving chemical drums: https://www.salesbridges.eu/en/products/drums-lifter/
I can recommend the NPR planet money episode ”The onion king” if you are into commodities trading.
Quirky and laugh out loud funny. Thank you for the post.
I agree that was a fun read
I wonder what the bitcoin is worth now...