Is there a market for barrels? - I would assume most oil is stored in tanks, transported via pipeline to harbor, loaded onto tanker and oil trucks with never seeing a barrel and the barrel mostly serving as a unit for calculation.
Im in Texas, lots of oil, and have seen market for such barrels when shopping for shipping containers and IBC totes in the past. Usually I find sellers of these things near distribution hubs.
The barrels never had been used for crude oil when I’ve inquired. Sometimes a refined oil product likely used as a raw material for a manufacturing process, but never crude. I think it’s never transported in such small quantities to make sense of using actual barrels. It’s more so a unit of measure, probably with some valid historical context.
My understanding is it’s most likely transported from a well via a pipeline and may need a short trip in a truck or train (tanker style) to get to the pipeline from the well. The well itself usually has a collection reservoir to allow for 24/7 extraction.
I don’t know exactly I’ve just been vaguely around oil industry and engineers my whole life due to where I live.
Hello, my family has property with nat gas and some oil wells on it, and I've been out in the field with relatives that work in the industry.
In small fields they'll typically have larger tanks from the 1,000 to 10,000 gallon size. Wells typically also produce some water and small amounts of nat gas so they'll have some way to either store or burn the gas, and they'll either separate the water on site for disposal, or have a mixed oil/water product that is seperated at a later stage.
If the node isn't on a pipeline a vacuum/pump truck will show up either when the alerting systems hit a particular level, or when a particular interval of time has passed to ensure the equipment is still working.
Modern bulk pump trucks are simply the fastest way to move the product. No one in it for profit is going to move the unrefined product in amounts that small. It's not valuable enough.
As conductr says, barrels are still commonly used for refined oil products. I worked at a gas station as a teenager, and we sold barrels of oil to farmers. They worked on a deposit system, we'd buy back the barrels. Or more commonly the farmer brought back the empty when buying a new barrel so didn't get charged the deposit.
I have one for making into a little stove with a kit from Amazon and lots of people use metal barrels for burning trash in rural areas. They are super cheap though like $10.
For carbon footprint also, I believe. For bottled water at least, manufacturing the bottle has by far the most environmental impact, even more so than the shipping/transportation part of the process (which you'd think would be severe, as water is heavy).
That's an interesting tidbit. Every time there is a suggestion we switch to reusable glass bottles instead of plastic, someone raises the issue of the extra weight of the bottle which will lead to greater carbon emissions during transport.
But if, as you say the largest emission comes from manufacturing the plastic bottle, not the transport of the bottle AND the content; then it seems possible to lower the carbon footprint by switching to glass (on top of the other advantages like reducing landfill use/litterring/environmental pollution).
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.
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.
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.
It's also a head-ache for options traders because some options models (black scholes) have log-normal pricing baked in which don't actually allow for the underlying asset to go negative. So nevermind worrying about taking delivery, your HFT options desk just had their algo blow up.
i figured these ETF providers have to have sufficient capital in reserve to allow for it perhaps? I mean, how does it work if they defaulted on those options by not being able to take delivery? Who pays?
Some ETFs can't go negative because they're moving say, stock in oil refiners, oil research, etc. and they've got a model to try to follow the motion of oil futures based on investments in those stocks. So for them this sort of chaos is not good of course, but they don't have scary red numbers everywhere and people who might jump out of a window.
In some cases there is basically a bucket shop (hopefully not literally, those are illegal) and so you're betting against somebody with lots of capital, but in that scenario it can definitely go very bad and it's important to read your fine print. I believe in 2020 some funds pointed out that in their fine print it said they get to choose not to follow a month's oil delivery if they need to, so, you expected $15M for the June oil because it went negative as you'd hoped, but too bad we've decided to roll that over to July oil, and that's going to lose you money as you have to wait a month longer and get worse results.
That sort of thing is obviously infuriating for an investor, but as with gambling firms who won't pay (and this happens a lot if you win serious money gambling, e.g. Oops, when you gave us $100 we forgot to ask for valid ID, but now that we owe you $150 000 because you got lucky we've remembered - without ID actually the bet was illegal, so here's the $100 back and no hard feelings) they get a reputation for not paying and that does eventually hurt them.
> 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.
This comment shows what is wrong with people's understanding of futures markets. Commodity futures are not for the supply of commodities. If you need a supply of commodities, cash contracts are your thing.
Futures, specifically, are useful for implicitly borrowing commodities to control inventory levels across time. An airline needs continuous access to jet fuel, so to be safe, they buy more jet fuel than they need in the cash market. But they don't want to pay for owning all this jet fuel, so they simultaneously sell it off in the futures market. Thus, they have created a loan of jet fuel, making sure they have spare fuel available when they need it without outright having to own it.
In order to have a loan, one needs a speculator willing to buy the credit risk. More speculators usually leads to more liquidity and more accurate deals on loans. There's nothing wrong with this at all.
See The Economic Function of Futures Markets by Williams (1986) if you are curious.
Man, it's hilarious how you managed to go full circle around the point while missing it.
If the airline wants to ensure future supply at a given prices they can simply buy futures settled in actual product.
Hedging against future volatility by agreeing on a deal "now" is the entire point. Sure, sometimes you lose when there's a price drop but the other guy won. At the end of the day everyone benefits from smoothing out the volatility.
Buying and selling cash settled futures is just how small time buyers and sellers access the market since they can't take delivery of entire train loads of goods but still need to hedge.
Finance professionals trading them around to wring out an extra percent here and there it beside the point.
Hedging can’t be the only point, which is something we have known since the ancient Babylonians invented futures.
For every person who is trying to hedge future volatility, there has to be a person on the other side of that contract who is speculating on the possibility that the hedge guy is more frightened that they should be.
You need hedgers and speculators to have a two-way market, and in markets where you have predominantly hedgers they get completely fleeced by the few speculators brave/dumb enough to take the other side of their trades. This is because many markets are structurally unbalanced such that the people who need to hedge long (producers) and people who need to hedge short (consumers) operate on different timeframes etc. So if I’m a farmer growing some crop I might want to sell the 1yr future, but the guy trying to hedge the price for purchase (wholesale grocer or whatever) will be hedging the front future like 1m out. So someone has to carry the risk in the forward curve between 1m and 1 year or noone gets the hedge they need and the market doesn’t work.
Quite aside from that, there are all sorts of things which are cash-settled because you literally can’t do a physical settlement but people need to hedge (yes and speculate) anyway. Take an index future on an equity index. How are you going to physically settle a future on the SPX or (god forbid) the Russell? The liquidity consequences would be devastating to markets.
Buyers and sellers both want to hedge and they're both happy to give up some potential upside of getting one over on the other guy in exchange for stability.
As you mentioned, timeframes and volumes often don't match up perfectly. So enter the speculators. They provide a lot of the liquidity. And they get paid for it. Like they make a 1yr bet and 12 1mo counter bets and do that enough that the wins and losses smooth out and they make a few pennies on the dollar.
The futures market is basically a cyclone of financialization whipping around an eye of "actual business doing actual things" that needs to smooth out volatility (because you can't make a huge investment in a volatile market or you might get screwed into not being able to make payroll some quarter even though what you're up to is solvent any given year).
You can apply the same model to financial goods (and you often want to because the solvency of all sorts of banking activities is predicated on market conditions the same way that industrial activity is dependent upon commodity prices and you can't have good stuff going tits up because of a bad quarter)
But at the end of the day you need some core of participants who at the limit are willing to pay to limit/cap/reduce risk and volatility otherwise there's no market because the whole market is bets and counter bets about how that core activity will turn out.
No, this is a common misconception. If hedging was the point, futures markets would show more evidence of risk aversion than they do. Again, I recommend that Williams' book if you're curious!
I guess I was thinking more like: you pay for a contract for bundle of resources now, to insure you against capacity overruns, and to sell it back at a future date. You can probably arbitrage the difference due to on-demand/reserved-capacity pricing ratio.
But also i don't really understand what you mean by infinitely perishable? Can you explain more?
What I mean is that 5 bushels of wheat purchased now and stored properly can be used just the same now as three months from now. On the other hand, at a fundamental level, 5 minutes of compute purchased now are gone forever if not used.
When a clould provider pretends to sell you five minutes of compute they are not really selling you five minutes of compute, but promising to split off five minutes of partial compute from other tenants to make room for you. It gets a little complicated...
There is no loan necessary in the plane example. Future is an agreement that you will buy/sell a thing for set price in a set date. No one needs to borrow anything for it to work. To manage the repository, the plane company will have contract to by x barrels at 1 of March for some price. That is it, that is what future is - contractual obligation to with a set date.
Also, while origin stories are nice, most future trades are pure speculations on price. There is no reason to pretend these original stories are how securities are actually used.
Your story may make a bit more sense with options where one party can choose to exercises their right to sell or buy. Then you can use it to manage actual amounts of commodity. But futures do not carry any such option with it. It is strict agreement with no choices. The plane company can use futures to guarantee certain fuel price in the future, so that some short term market swing wont make fuel too expensive for them.
That is also not what Williams says. He says a simultaneous long cash--short future position is practically the same as a loan of the corresponding commodity. (With the lending side being short cash--long future.) This activity accounts for many of the patterns we see in futures markets.
A futures trade always involves variation margin, and if you read a margin agreement you’ll see it is a credit agreement. That’s so people don’t just run away from trades which are underwater and screw the other side over.
I’m not sure about “vast majority”. Barring some exceptions (e.g. lean hogs), many of the commodities futures are physically delivered (e.g. gold, silver, copper, corn, wheat, soybean, natural gas, live cattle). Financial futures like S&P 500, 3-month SOFRs are obvious financially settled as they don’t correspond to anything physical.
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!
It's not at all uncommon to trade a tanker load of oil, and this may result in the tanker being re-directed mid-trip, or being anchored somewhere for a while. Those are normal shipping events. (Yes, there are parking spaces for oil tankers. Here are the ones in the San Francisco Bay.[1])
I have read of an oil trader who bought a trainload of railroad tank cars of oil as a similar deal. That was a bigger hassle, because finding and paying for a storage track to park the tank cars became his problem. There is a market in railroad siding for storage, but there are not that many available spaces. Most of them are in Outer Nowhere, someplace where there used to be something that needed track but no longer does.[2] Managing this tied up a lot of high-priced broker time. Supposedly worked out OK, but nobody wanted to do it again.
Have you got a link to a different account? This one describes it as an XML parsing error (expecting true/false instead of 0/1) combined with some hubris on the part of the the trading exec ("what part of ‘execute my f*ing trade’ don’t you understand!")
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:
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?
To the first approximation, yes. But there are different standards for oil and they trade at different prices (e.g. Brent is more expensive than Urals).
Like commodity I suppose it also gets used to describe things that may not be 100% fungible but may be pretty close depending on the details and the circumstances.
If you are looking for more opportunities, recall that the difference between entities and value objects in domain-driven design is that value objects are fungible.
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...
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
Is there a market for barrels? - I would assume most oil is stored in tanks, transported via pipeline to harbor, loaded onto tanker and oil trucks with never seeing a barrel and the barrel mostly serving as a unit for calculation.
Im in Texas, lots of oil, and have seen market for such barrels when shopping for shipping containers and IBC totes in the past. Usually I find sellers of these things near distribution hubs.
The barrels never had been used for crude oil when I’ve inquired. Sometimes a refined oil product likely used as a raw material for a manufacturing process, but never crude. I think it’s never transported in such small quantities to make sense of using actual barrels. It’s more so a unit of measure, probably with some valid historical context.
My understanding is it’s most likely transported from a well via a pipeline and may need a short trip in a truck or train (tanker style) to get to the pipeline from the well. The well itself usually has a collection reservoir to allow for 24/7 extraction.
I don’t know exactly I’ve just been vaguely around oil industry and engineers my whole life due to where I live.
Hello, my family has property with nat gas and some oil wells on it, and I've been out in the field with relatives that work in the industry.
In small fields they'll typically have larger tanks from the 1,000 to 10,000 gallon size. Wells typically also produce some water and small amounts of nat gas so they'll have some way to either store or burn the gas, and they'll either separate the water on site for disposal, or have a mixed oil/water product that is seperated at a later stage.
If the node isn't on a pipeline a vacuum/pump truck will show up either when the alerting systems hit a particular level, or when a particular interval of time has passed to ensure the equipment is still working.
Modern bulk pump trucks are simply the fastest way to move the product. No one in it for profit is going to move the unrefined product in amounts that small. It's not valuable enough.
As conductr says, barrels are still commonly used for refined oil products. I worked at a gas station as a teenager, and we sold barrels of oil to farmers. They worked on a deposit system, we'd buy back the barrels. Or more commonly the farmer brought back the empty when buying a new barrel so didn't get charged the deposit.
There is.
https://www.purepac.co.uk/shop/category/drums/plastic-and-st...
Those are 200L, a "barrel" as a unit for crude oil is ca. 159 liter.
Now for some use that may be fine, but that also requires proper cleaning (following environment proection rules etc)
My question was more like a cycle. The metal itself certainly got some value as well.
I have one for making into a little stove with a kit from Amazon and lots of people use metal barrels for burning trash in rural areas. They are super cheap though like $10.
Didn't the price of the actual barrel became more onerous than the product itself during covid?
This is common for a huge number of products, ranging from cosmetics, consumables, pharmaceuticals, bottled water, etc.
For carbon footprint also, I believe. For bottled water at least, manufacturing the bottle has by far the most environmental impact, even more so than the shipping/transportation part of the process (which you'd think would be severe, as water is heavy).
That's an interesting tidbit. Every time there is a suggestion we switch to reusable glass bottles instead of plastic, someone raises the issue of the extra weight of the bottle which will lead to greater carbon emissions during transport.
But if, as you say the largest emission comes from manufacturing the plastic bottle, not the transport of the bottle AND the content; then it seems possible to lower the carbon footprint by switching to glass (on top of the other advantages like reducing landfill use/litterring/environmental pollution).
in one market oil prices even went negative so presumably, yeah.
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.
This is right up there with the futures trader who accidentally ordered a barge full of coal delivered to his manhattan office.
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.
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.
It's also a head-ache for options traders because some options models (black scholes) have log-normal pricing baked in which don't actually allow for the underlying asset to go negative. So nevermind worrying about taking delivery, your HFT options desk just had their algo blow up.
i figured these ETF providers have to have sufficient capital in reserve to allow for it perhaps? I mean, how does it work if they defaulted on those options by not being able to take delivery? Who pays?
Some ETFs can't go negative because they're moving say, stock in oil refiners, oil research, etc. and they've got a model to try to follow the motion of oil futures based on investments in those stocks. So for them this sort of chaos is not good of course, but they don't have scary red numbers everywhere and people who might jump out of a window.
In some cases there is basically a bucket shop (hopefully not literally, those are illegal) and so you're betting against somebody with lots of capital, but in that scenario it can definitely go very bad and it's important to read your fine print. I believe in 2020 some funds pointed out that in their fine print it said they get to choose not to follow a month's oil delivery if they need to, so, you expected $15M for the June oil because it went negative as you'd hoped, but too bad we've decided to roll that over to July oil, and that's going to lose you money as you have to wait a month longer and get worse results.
That sort of thing is obviously infuriating for an investor, but as with gambling firms who won't pay (and this happens a lot if you win serious money gambling, e.g. Oops, when you gave us $100 we forgot to ask for valid ID, but now that we owe you $150 000 because you got lucky we've remembered - without ID actually the bet was illegal, so here's the $100 back and no hard feelings) they get a reputation for not paying and that does eventually hurt them.
> 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)
Isn't it the other way around? Because you would be stuck holding the bag the prices went negative?
I guess it depends how you look at it, the two things are intertwined.
> 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.
This comment shows what is wrong with people's understanding of futures markets. Commodity futures are not for the supply of commodities. If you need a supply of commodities, cash contracts are your thing.
Futures, specifically, are useful for implicitly borrowing commodities to control inventory levels across time. An airline needs continuous access to jet fuel, so to be safe, they buy more jet fuel than they need in the cash market. But they don't want to pay for owning all this jet fuel, so they simultaneously sell it off in the futures market. Thus, they have created a loan of jet fuel, making sure they have spare fuel available when they need it without outright having to own it.
In order to have a loan, one needs a speculator willing to buy the credit risk. More speculators usually leads to more liquidity and more accurate deals on loans. There's nothing wrong with this at all.
See The Economic Function of Futures Markets by Williams (1986) if you are curious.
Man, it's hilarious how you managed to go full circle around the point while missing it.
If the airline wants to ensure future supply at a given prices they can simply buy futures settled in actual product.
Hedging against future volatility by agreeing on a deal "now" is the entire point. Sure, sometimes you lose when there's a price drop but the other guy won. At the end of the day everyone benefits from smoothing out the volatility.
Buying and selling cash settled futures is just how small time buyers and sellers access the market since they can't take delivery of entire train loads of goods but still need to hedge.
Finance professionals trading them around to wring out an extra percent here and there it beside the point.
Hedging can’t be the only point, which is something we have known since the ancient Babylonians invented futures.
For every person who is trying to hedge future volatility, there has to be a person on the other side of that contract who is speculating on the possibility that the hedge guy is more frightened that they should be.
You need hedgers and speculators to have a two-way market, and in markets where you have predominantly hedgers they get completely fleeced by the few speculators brave/dumb enough to take the other side of their trades. This is because many markets are structurally unbalanced such that the people who need to hedge long (producers) and people who need to hedge short (consumers) operate on different timeframes etc. So if I’m a farmer growing some crop I might want to sell the 1yr future, but the guy trying to hedge the price for purchase (wholesale grocer or whatever) will be hedging the front future like 1m out. So someone has to carry the risk in the forward curve between 1m and 1 year or noone gets the hedge they need and the market doesn’t work.
Quite aside from that, there are all sorts of things which are cash-settled because you literally can’t do a physical settlement but people need to hedge (yes and speculate) anyway. Take an index future on an equity index. How are you going to physically settle a future on the SPX or (god forbid) the Russell? The liquidity consequences would be devastating to markets.
That's just not the case though.
Buyers and sellers both want to hedge and they're both happy to give up some potential upside of getting one over on the other guy in exchange for stability.
As you mentioned, timeframes and volumes often don't match up perfectly. So enter the speculators. They provide a lot of the liquidity. And they get paid for it. Like they make a 1yr bet and 12 1mo counter bets and do that enough that the wins and losses smooth out and they make a few pennies on the dollar.
The futures market is basically a cyclone of financialization whipping around an eye of "actual business doing actual things" that needs to smooth out volatility (because you can't make a huge investment in a volatile market or you might get screwed into not being able to make payroll some quarter even though what you're up to is solvent any given year).
You can apply the same model to financial goods (and you often want to because the solvency of all sorts of banking activities is predicated on market conditions the same way that industrial activity is dependent upon commodity prices and you can't have good stuff going tits up because of a bad quarter)
But at the end of the day you need some core of participants who at the limit are willing to pay to limit/cap/reduce risk and volatility otherwise there's no market because the whole market is bets and counter bets about how that core activity will turn out.
No, this is a common misconception. If hedging was the point, futures markets would show more evidence of risk aversion than they do. Again, I recommend that Williams' book if you're curious!
It would be good if you could do this with cloud capacity.
Pretty much the Reserved Instance Marketplace
Did not know about that! Can you recommend an approach, any cautionary tales? Do clouds beyond AWS have similar?
Doesn't make sense for e.g. compute because compute resources are infinitely perishable. Maybe could work for storage.
I guess I was thinking more like: you pay for a contract for bundle of resources now, to insure you against capacity overruns, and to sell it back at a future date. You can probably arbitrage the difference due to on-demand/reserved-capacity pricing ratio.
But also i don't really understand what you mean by infinitely perishable? Can you explain more?
What I mean is that 5 bushels of wheat purchased now and stored properly can be used just the same now as three months from now. On the other hand, at a fundamental level, 5 minutes of compute purchased now are gone forever if not used.
When a clould provider pretends to sell you five minutes of compute they are not really selling you five minutes of compute, but promising to split off five minutes of partial compute from other tenants to make room for you. It gets a little complicated...
There is no loan necessary in the plane example. Future is an agreement that you will buy/sell a thing for set price in a set date. No one needs to borrow anything for it to work. To manage the repository, the plane company will have contract to by x barrels at 1 of March for some price. That is it, that is what future is - contractual obligation to with a set date.
Also, while origin stories are nice, most future trades are pure speculations on price. There is no reason to pretend these original stories are how securities are actually used.
Your story may make a bit more sense with options where one party can choose to exercises their right to sell or buy. Then you can use it to manage actual amounts of commodity. But futures do not carry any such option with it. It is strict agreement with no choices. The plane company can use futures to guarantee certain fuel price in the future, so that some short term market swing wont make fuel too expensive for them.
> There is no loan necessary ...
That is also not what Williams says. He says a simultaneous long cash--short future position is practically the same as a loan of the corresponding commodity. (With the lending side being short cash--long future.) This activity accounts for many of the patterns we see in futures markets.
A futures trade always involves variation margin, and if you read a margin agreement you’ll see it is a credit agreement. That’s so people don’t just run away from trades which are underwater and screw the other side over.
I’m not sure about “vast majority”. Barring some exceptions (e.g. lean hogs), many of the commodities futures are physically delivered (e.g. gold, silver, copper, corn, wheat, soybean, natural gas, live cattle). Financial futures like S&P 500, 3-month SOFRs are obvious financially settled as they don’t correspond to anything physical.
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!
I would love a link to that article lol
This is where I read it: https://thedailywtf.com/articles/Special-Delivery
That writeup seems exaggerated. When I read the story, it was a newbie at a Bloomberg Terminal who pressed the wrong button.
Right. That one is probably fake.
It's not at all uncommon to trade a tanker load of oil, and this may result in the tanker being re-directed mid-trip, or being anchored somewhere for a while. Those are normal shipping events. (Yes, there are parking spaces for oil tankers. Here are the ones in the San Francisco Bay.[1])
I have read of an oil trader who bought a trainload of railroad tank cars of oil as a similar deal. That was a bigger hassle, because finding and paying for a storage track to park the tank cars became his problem. There is a market in railroad siding for storage, but there are not that many available spaces. Most of them are in Outer Nowhere, someplace where there used to be something that needed track but no longer does.[2] Managing this tied up a lot of high-priced broker time. Supposedly worked out OK, but nobody wanted to do it again.
[1] https://www.sfmx.org/wp-content/uploads/2017/01/Anchorage-9-...
[2] https://sidings.ca/collections/sidings
Have you got a link to a different account? This one describes it as an XML parsing error (expecting true/false instead of 0/1) combined with some hubris on the part of the the trading exec ("what part of ‘execute my f*ing trade’ don’t you understand!")
This is like a friendlier version of r/wsb’s stories.
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
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!!!!"
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
https://archive.is/SKAKk
The Gang Solves the Gas Crisis.
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?
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.
To the first approximation, yes. But there are different standards for oil and they trade at different prices (e.g. Brent is more expensive than Urals).
Like commodity I suppose it also gets used to describe things that may not be 100% fungible but may be pretty close depending on the details and the circumstances.
If you are looking for more opportunities, recall that the difference between entities and value objects in domain-driven design is that value objects are fungible.
Quirky and laugh out loud funny. Thank you for the post.
I agree that was a fun read
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