WTI (West Texas Intermediate, the one that went negative) is already settled at a specific place: Cushing, Oklahoma. Unlike with Brent Crude you can't just drive a tanker up to Cushing Oklahoma. So if you buy a WTI contract you are promising to take delivery of 42,000 gallons of oil there...it's the nature of the contract that there's no way around this.
Right, but the reason it went negative is that there was no place to store the oil (demand for storage went through the roof because demand for actual oil plummeted). So that if you held one of these contracts, you had to pay someone to store your oil (directly or indirectly, if doing a cash-settled contract). If the people in the article did cash-settled contracts they would have been in just as much trouble.
Cash settled contracts exist. These people just chose not to buy them. The question is how to structure physically settled contracts. After all, oil needs to get delivered to someone at some point.
If you get into the market for physically settled contracts with no intention of taking delivery, then you're almost certainly a speculator. I'm not sure that it's the market's job to make that safer for you.
I am not justifying inaccurate pricing. Burning speculators is fine, but give everyone accurate information.
> If you get into the market for physically settled contracts with no intention of taking delivery, then you're almost certainly a speculator.
Hard disagree. There are lots of reasons people with legitimate hedging concerns who don't intend to take physical delivery prefer the physical contract to a CSC (if it's even available).
These futures contracts are for delivery at a specific location. What if you just dont want a million barrels 2000 miles away? Cash settled seems a lot more flexible for lots of industrial use.
If you need large amounts of oil, then either you plan on taking physical delivery, so you can just let the contract expire, or you don't plan on taking delivery of that oil, in which case you want cash settlement contracts.
Good lord, if you actually need the oil, then take delivery!
The issue here is total speculators using PHYSICALLY settled contracts to speculate who don't want delivery.
The number of people who need WTI are pretty few - refiners and some small others. Seriously - with WTI you still need to refine it - airlines CANNOT just load WTI into their tanks.
These sob stories from folks who supposedly were bidding to take delivery of physical oil (unrefined) from a condo somewhere are ridiculous.
To trade futures you need to certify you understand them. I'd love to see the form this guy filled out listing what was likely a fair bit of bogus experience.
Airlines buy futures in Jet A or Jet A-1. They have no interest in crude oil because they aren't refiners and they have nothing to do with it.
The freight industry will similarly buy futures in bunker fuel, diesel, or whatever exactly they use to fuel their vehicles. Again, they're not refiners and have no use for raw crude.
It's the oil refiners that buy futures in crude. Well, them and speculators.
> Airlines buy futures in Jet A or Jet A-1. They have no interest in crude oil
It doesn't matter. Airlines absolutely buy crude futures to hedge against changes in fuel cost. It might be impossible to buy futures in the exact good you need, or it might be too expensive due to illiquidity and slippage.
It's like how beer manufacturers buy aluminum futures even though they almost never take delivery on the futures. They're just going to buy the processed aluminum from their regular processed aluminum supplier, but they can still hedge some of the price changes with the easily available physical aluminum futures.
There are jet fuel futures. If they speculate on crude and then jet fuel itself goes up because e.g. a big jet fuel refinery blew up, they're screwed, because the crude future didn't actually hedge against the specific problem they're facing, and now they have to pay a lot more for jet fuel. Or it could be any other problem that specifically affects jet fuel but not crude in general.
The contract is for a particular kind of crude delivered at a specific location. Most hedgers would still be better off closing the futures contract and taking the delivery they actually want instead.
