I Tried to Buy an Actual Barrel of Crude Oil (2015)
19 comments
·April 22, 2025ahazred8ta
This is right up there with the futures trader who accidentally ordered a barge full of coal delivered to his manhattan office.
colechristensen
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.
tialaramex
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.
chii
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?
Marazan
> 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.
speedylight
I would love a link to that article lol
beaviskhan
This is where I read it: https://thedailywtf.com/articles/Special-Delivery
emchammer
That writeup seems exaggerated. When I read the story, it was a newbie at a Bloomberg Terminal who pressed the wrong button.
austinallegro
I want to buy pork bellies and frozen concentrated orange juice.
mihaic
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.
austinallegro
"Mr Duke your brother is unwell!"
"F*K HIM!!!!"
steveBK123
She’s an entertaining writer & co anchors a podcast called Odd Lots, for those unaware. Entertaining and informative on various niches of money & markets.
timewizard
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:
bubblethink
The Gang Solves the Gas Crisis.
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.