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> cost of storing that oil is getting really high

If anything, this is a wild understatement. Each contract represents 1000 barrels of toxic waste. You can't just have that stored in a shed or something. And all the commercial regulation compliant storage is gone. I'd be willing to bet you will have a hard time even finding a tanker truck to take it to a buyer, since the tanker owners themselves are going to be using those trailers as temporary storage facilities. Anyone stuck taking delivery of barrels right now is in for a world of hurt. The legal fees alone are going to be ruinous.

In the USA at least, EPA enforcement has been drastically relaxed to allow a bit more freedom in regard to this issue in exchange of public safety and environmental stability.

I wouldn't be surprised if someone doesn't see the opportunity to just dump oil from their tankers to take on an additional lucrative storage contract from a speculator caught off guard.

ELPC just released this report for example claiming the number of facilities regulated by the EPA that are out of compliance have doubled in the last year.

http://elpc.org/wp-content/uploads/2020/04/Region5Report_FIN...

> EPA enforcement has been drastically relaxed to allow a bit more freedom

EPA enforcement has been relaxed because the toxic sludge dumpers with influence in the Trump Administration have always wanted to gut environmental regulations and avoid legal liability for giving their neighbors cancer, but now they have a convenient excuse.

Forgive me if this is a stupid question but they can’t hold a gun to your head to force you to take the oil, right? Can’t you just refuse the delivery if you have nowhere to store it? Is there language in the contract for this kind of situation?

In this sense "barrel" is a unit of measure. The oil is physically in tanks in Oklahoma. When oil is delivered it stays in the same tank, but the ledger for the tank contents are updated.

Once delivery is made you are now on the hook for the storage costs - which are going sky high because there is no available storage inventory. You can default on your obligations to the storage company, but they will sell off whatever oil you hold to cover debts and then sue you for the rest.

When the market is functioning correctly you end up paying for a few days of storage while the oil is diverted to a pipeline where you can extract it, or it is offloaded on to your train/truck/tanker/etc.

That's not a stupid question it's an excellent one. If you don't take delivery you're in breach of contract. The penalties for that are going to depend on how the judicial process works out.

This has never happened before, so I don't know how it will play out other than that it's going to be wildly messy. Probably far messier than anyone, myself included, is imagining.

>That's not a stupid question it's an excellent one. If you don't take delivery you're in breach of contract. The penalties for that are going to depend on how the judicial process works out.

That sounds incorrect. The whole point of having standardized, commodified units trading on organized exchanges is that you don’t have to reinvent the dispute-resolution wheel — or turn it over to super slow courts — for every foreseeable thing that can go wrong. So there should be a specific procedure and penalty you can look up.

I asked the same question and got this answer that seems more correct and along the lines of my intuition, that the exchange holds it (or rather, directs others to home it) and bills your account for the cost:

https://news.ycombinator.com/item?id=22929334

The contract[1] assumes that Cushing has storage capacity. IANAL so I don't know how material that will be, but I continue to expect that lawyers will get involved and this will be a mess.

[1] https://www.cmegroup.com/content/dam/cmegroup/rulebook/NYMEX...

At the risk of sounding stupid, I have to ask...

Would it be possible to simply pump the oil back into the ground wherever the closest oil field is?

In an arrangement with the US Government it could be put into the ground, elsewhere. Doing it without state permission would be an entirely different matter however. I'm not aware of any very large, privately owned underground storage caverns (such that they could make a dent in absorbing the over-supply).

This is being discussed:

"The U.S. Energy Department is negotiating with nine companies to rent about 23 million barrels of oil storage capacity in its Strategic Petroleum Reserve as part of a Trump administration bid to help drain the country’s growing glut of crude."

https://www.worldoil.com/news/2020/4/14/doe-working-to-lease...

Here is what the US Strategic Petroleum Reserve looks like (it can absorb some of our over-supply briefly):

> Four underground salt caverns on the coast of the Gulf of Mexico store the oil. That's a central location. The oil can be distributed to nearly half of the U.S. oil refineries either through interstate pipelines or via barges. It only takes 13 days for the oil to enter the U.S. market from the time the president first gives the order.

> There are two cavern locations in Texas. As of September 30, 2018, Bryan Mound held 235.3 million barrels in 20 caverns. Big Hill held 153.4 million barrels in 14 caverns. The other two are in Louisiana. West Hackberry held 199.5 million barrels in 22 caverns. Bayou Choctaw held 71.88 million barrels in 6 caverns.

> The maximum capacity of all four caverns is 727 million barrels.

There is also a good FAQ on it:

https://www.energy.gov/fe/services/petroleum-reserves/strate...

Why don't we just take delivery of futures contracts directly? Isn't this a great time to fill the reserve?

Pelosi blocked that.

The workaround is to cheaply rent out the reserve as storage space, with the hope that someday a better congress will allow purchasing the oil.

>Pelosi blocked that.

Why should the American people pay to fill it when they can now be paid instead to store the oil? The market's decided that the toxic asset needs to go somewhere and the speculators that bought it (not the producers) will pay.

>The workaround is to cheaply rent out the reserve as storage space

Cheaply? They took a risk in speculating and it didn't work out. The solution is to give them a choice: surrender their oil to the USG (to avoid paying storage fees) or pay the USG for the service of storing it.

No bailouts, fuck that.

I can understand the impulse, and absent any middlemen it would make perfect sense to have the government step in to buy excess production during a crisis to fill national reserves.

But we have speculators who sold us the idea that their profits brought stability to the market, so make them keep playing by their own rules.

Bailout?

It's not a bailout. Prices were negative! We'd literally be _getting paid_ to take oil and put it into our reserve. It's literally the easiest financial decision on the planet.

The fact that Pelosi blocked it demonstrates a fundamental lack of understanding of basic finance.

Hm, I can't find any sources to this effect. Have one? I vaguely recall a bit about paying over market for petroleum to refill the reserve, with the idea being we fill a demand and prop up the gas industry.

McConnell proposed it in the coronavirus stimulus bill but it wasn't in Pelosi's version.

So frackers have to deleverage all by themselves? Cry me a (unpolluted) river.

The USG can top off the reserve at any time and it'd be chump change. They're spending trillions of dollars these days. They're not concerned with a few billion dollars worth of oil here and there.

With negative prices, it's literally the dumbest financial decision not to take the oil - whatever the quantity we're talking about.

Already being done, and that space too is running out.

The reserve is already 90% full.

10% of the capacity at what was NEGATIVE $30 per barrel is still a lot of extra money for doing literally nothing.

Anyone not filling any available storage is a huge idiot.

I am curious, dohappen to have a source for that statement?

Capacity of 717 million barrels. [1]

Inventory of 635 million barrels. [2]

635/717 = 88.5%

[1] https://en.wikipedia.org/wiki/Strategic_Petroleum_Reserve_(U...

[2] https://www.spr.doe.gov/dir/dir.html

it is and we do.

I love this question! Mainly because first I laughed at "But that would be silly -- we spent all this effort taking it out of the ground", but on second thought it represents a reasonable thought of "We got it from the ground, therefore the ground isn't the worst place for this stuff maybe?".

In crux, thanks for asking :)

Doesn't the oil just come out of the oil well from its own pressure? Which would make pumping oil back in the oil field complicated

In some places, yes, but would you see these pumps the US if that were always the case?

https://youtu.be/X0Dpd52pfp0

There's lots of empty oil fields out there though. Many of them could hopefully be refilled just using gravity?

Reconfiguring wells to reverse flow is a lot of work, and would take a significant amount of time to setup. This can happen with old gas wells, excess gas can be compressed and reinjected into the well, but they are specially designed systems.

The US Strategic Petroleum Reserve is stored underground, surely they could build a similar reservoir

You could. Though it’d cost billions of dollars and would not be done by the time the contracts expire and deliver needs to be taken.

That sounds like it'd get the EPA involved if you just dumped it, and I would expect that putting oil into an actual oil well is not easy.

Actually with LP gas that's a pretty common storage method in Michigan.

https://www.mlive.com/news/2016/01/michigan_has_most_undergr...

Also there's some underground cave like structures East of Grand Rapids where they store fuel as well.

I'm surprised that someone didn't just corral some bankruptcy-proof people together and offer them some cash each to be the holder of record.

The position is collateralized, all this does is lose you money.

This sort of refusal would likely has contractual penalties associated with it. Drillers and pipeline operators can't just shut down infrastructure by flipping a switch like it's nothing; it costs real money to perform shutdown procedures or restart pipeline pumps.

I bet all the lawyers who put such clauses in futures contracts are feeling pretty smug right now. I can imagine an oil producer going "Why on earth do we need to put this in the contract? Of course they'll accept delivery. If they don't then that's great for us."

That's actually a really good point. I've gone through plenty of contracts that are 20+ pages in length and wondered if they really need to be that long.

It's times like these that those contract clauses protect you, in a big way.

Why do we discuss this clause as something unique? Not accepting delivery is a standard clause in transport, even small internet shops handle that.

Eh, they probably thought it (however unlikely) could happen for reasons other than a pandemic. Like unprecedented green energy incentives leading to everyone suddenly driving an EV.

That example is a bit implausible. This is only a problem when oil prices fall very low very quickly. Manufacturing constraints prevent mass EV adoption on those timescales.

On the other hand, people who draft contracts for big corporations get to talk to risk analysts and ask "if we agree to this, what might go wrong that causes us to lose money?" and write clauses that generally protect them from that risk.

When it costs you nothing to add a clause to a contract, you don't need to come up with a plausible scenario for how something could happen, you only need to foresee the logical possibility of it occurring for any reason whatsoever. Part of managing risk is understanding the world is much more creative at coming up with failure scenarios than you are.

That sums up my intention. I shouldn't have provided an example, for precisely the reason you describe: it's not likely to be what causes the clause to be invoked.

That could happen over a span of decades or longer, not like 3 weeks.

For most people it's going to be cheaper to continue to use or buy a used gasoline vehicle than it will be to buy a new electric vehicle.

I believe you will get charged "demurrage" if you can't unload the oil in time. https://en.wikipedia.org/wiki/Demurrage

Well, you'll be on the hook for the storage costs until you arrange somewhere for it to go, so in that sense, yes they can. Yeah, you can sell the oil to someone else in the future, but when? Meantime, you owe rent.

You are required to post cash collateral in order to take out a futures position. It's calibrated so that the cost of abandoning that collateral is large enough to basically be a gun to your head. Furthermore, when the price of the contract moves, they mark-to-market your collateral and credit/debit you your daily gains or losses.

Basically, the people holding the contracts have to either sell at a negative price to cover, pay to take delivery, or give up cash collateral that's worth even more money than the previous choices.

It’s likely that they’d be held liable for the costs of storage for the oil they did not take.

Rejecting delivery would be no different than any other contractual arrangement, like buying a car or selling stock. If you decide to not follow the contract, you'll be sued.

> since the tanker owners themselves are going to be using those trailers as temporary storage facilities.

Can the tanker just take the oil it's holding to the buyer, then replace it at profit?

Example:

Tanker is paid to hold Joe's oil

Bob needs a tanker to bring oil to Matt.

Tanker brings Joe's oil to Matt, and replaces the oil at a profit.

This is a very good point - unlike tree logs or something, you can't just pile up oil.

I dont even think youd be allowed to burn unrefined oil in mass.s

> Producers already got paid for this production a long time ago

It's a future market for the public. You don't know which side you are trading with (trader or producer) but they are all trading at all times even if they are not transacting.

Here is an example: Let's say you are a producer that a sold a future contract a long time ago at $25. You have the opportunity to buy that contract again today at -25$ and close your position. You have no oil to deliver + you made $50 per barrel more than what oil is trading at in Europe.

Given that we can conclude:

- Big producers are refusing the close positions to keep prices down. (or maybe they have a legitimate reason why they want to deliver their contracts?)

- The market temporarily dipped because of leveraged trading. Traders were a sleep/slow to react. (they don't have automated bots?)

- This price range (maybe not -25$ but maybe $5-0) is the real price of oil for these few days.

> Big producers are refusing the close positions to keep prices down. (or maybe they have a legitimate reason why they want to deliver their contracts?)

They have legitimate reasons why they want to deliver their contracts. Crude oil is highly toxic, they only have so much storage available, and shutting down wells incurs significant costs. If they don't buy back their short futures position at -$25/barrel, that means shutting down costs them at least $25 per barrel no-longer-produced.

Well to be honest, although it may not be true for oil, it can definitely be true briefly for electricity, because it’s use it or lose it. Battery storage is still in its infancy.

Negative prices are definitely a thing when you can’t stop production and all of a sudden storage or middlemen are over capacity.

LOOK AT WHAT IS HAPPENING right now in the US food chain! The farmers have to euthanize cattle rather than sell them because the price they get is lower than upkeep. Yet the price of meat at the supermarket is going up and up. What’s going on? Well, the processing plants have shut because they’re sending employees home if anyone is infected, and so the capacity of the middlemen drops. And boom, there is a huge inefficiency now.

Someone in congress is working on a bill to let the farmers and supermarkets disintermediate... as usual, decentralization to the rescue.

> Producers already got paid for this production a long time ago

Nothing requires a broker to be involved. Drillers can sell futures to "get paid now" for future production, and likely did so to cover expenses in these chaotic times.

If they issued a contract for 1000 barrels on the 1st of the month, produced that 1000 barrels on the 10th, and have an unsold contract on the last day of the month - they are screwed.

I'm confused, isn't issuing a contract bearish? They would be able to make a large profit but closing their position, wouldn't they?

Issuing a contract is bearish or bullish depending on the price.

It reminds me of a funny story in Options, Futures, and Other Derivatives, where some newbie trader mistakenly bought a contract on live cattle futures to close out a long position. The trader spent a couple weeks traveling thousands of miles and figuring out housing and food for hundreds of cattle until a buyer for them could be found.

There's another version of this involving a whole lotta coal:

https://thedailywtf.com/articles/special-delivery

But does this mean that the contract holder is paying someone to take their oil in the future? It feels significant that someone in the chain from producer to consumer is now paying to have someone take their product.

What happens if you just literally don't come pick up your oil? Lawsuit?

How is this not a good time to buy oil. Assuming a 5+ year time horizon.

It's a physical asset, with strict environmentally regulated storage requirements. Holding it speculatively for 5+ years requires that the speculation will pay in excess of the storage fees compounded at a reasonable risk adjusted rate of return for the 5 year duration.

This is a great deal if you happen to own cheap oil storage, I wouldn't be surprised if the main buyers of these contracts are the storage companies.