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.

Didn't the price of the actual barrel became more onerous than the product itself during covid?

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.

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?

> 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. 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’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.

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!")

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!!!!"

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:

https://www.cmegroup.com/rulebook/NYMEX/2/200.pdf

This level of standardisation is indeed what makes them so liquid and useful!

The Gang Solves the Gas Crisis.