I Tried to Buy an Actual Barrel of Crude Oil (2015)
(bloomberg.com)176 points by niklasbuschmann 2 days ago
176 points by niklasbuschmann 2 days ago
Did they pay extra for the barrel itself? Surely that steel doesn't come for free.
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.
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?
My understanding from some of these articles is that oil isn't literally transported in barrels the vast majority of the time, it's in tanker trucks/rail cars/ships moving from source to refinery to retail the whole way. Part of what makes it fun to "buy a barrel of oil" is that you can't go many places and ask for a barrel, you need to bring the thing to put it in (like a tanker truck or rail car).
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...
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.
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.
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.
I think hedging risks is a better example.
Imagine you're a software company in India, and you want to sign a 5-year contract with an American retailer. The retailer wants to know exactly how many Dollars they'll have to pay you for the software. You want to know exactly how many Rupees you will get to pay your employees.
Without futures, those two goals are incompatible, and the contract does not happen. With futures, the Indian company can decide to accept $1m, and buy a financial instrument that lets them exchange it in 5 years at current Rupee prices. They have to pay somebody for that privilege, but they know exactly how much they're paying, versus having an unbounded risk of currency fluctuations.
You can do the same with oil. Maybe you have no use for crude oil, but you expect your profits to fall as oil prices rise (maybe you're a transportation company locked into a long-term contract). You can hedge that risk by buying futures; if prices rise, you'll lose money on the contract, but you will make it up by selling the (now much more expensive) futures.
> All futures should be settled by the actual commodity!
Why? The legitimate hedging role of futures and options is often financial in nature, even for physically-settled contracts.
Take West Texas Intermediate as an example. That's a physically-settled contract, with delivery in Cushing, Oklahoma.
What if I want to lock in a future price of oil but I'm not in Cushing, Oklahoma? Nobody's going to create a liquid futures market with delivery to my loading dock, but most of the time I can get oil on the spot market from a local supplier that already includes/amortizes the transportation cost.
It's far better for me to use the liquid futures market for hedging and still buy on the spot market, closing out the futures contract before delivery. For me, it's as if the futures market is cash-settled, even with a completely non-speculative transaction.
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.
Contrary to people's expectations, it's not actually possible for "number go up" to continue forever. Privileged people have extracted value from marginalized people, the global south, the environment, and increasingly just domestic wealth inequality. There are fewer and fewer externalities you can profit from.
Not to sound Malthusian, but it was never going to happen that 9 billion people on the planet could live with a North American standard of life, and we stop global warming, and deforestation. It would be a sort of heat death for capitalism with no gradient of inequality left to extract value from.
Financialization is the last gasp attempt to make something from nothing. You're just betting on taking money from another person who is betting on taking money from you. The memeification of retail investing and the entire crypto market are the most naked version where there is simply no relation to any real resources.
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!
This is where I read it: https://thedailywtf.com/articles/Special-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 want to buy pork bellies and frozen concentrated orange juice.
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
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?
> 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.
Quirky and laugh out loud funny. Thank you for the post.
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.
I remember this, and it was hilarious.
Somewhat related is the tale of the commodities trade from DailyWTF that was unfortunately executed literally.
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.