Comment by paxys | Hacker News Reader

Comment by paxys | Hacker News Reader

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> if there's no demand for oil, suddenly you're holding barrels of toxic waste with real storage costs

Thing is ETFs like USO are created specifically to not take physical delivery of the oil. It wouldn't hold any May expiring contracts by design, and is already shifting out its June contracts. If suddenly every single contract for July, August and beyond went negative, and the fund didn't have enough cash to weather it, it would declare bankruptcy. That doesn't actually need this specific situation to happen. For example buying a contract at $100 and selling at $50 would have the same net effect for the fund as buying at $20 and selling at -$30.

There is no additional liability for the investors beyond the piece of paper they are holding (which is not a contract for oil delivery) becoming worthless, which is why zero is the hard floor.

What does that paper represent if not a contract for oil delivery? Presumably there's some real world oil backing it, and if so, where does that oil go?

The piece of paper a USO investor holds is shares in the fund. The fund itself holds the futures that are contracts for oil delivery. Limited liability protects the fund's shareholders.

So if the fund declares bankruptcy, who has to deal with the oil?

The contracts will be liquidated first, if possible. If the fund is still left holding some then the exchange and market makers will absorb the losses with their excess capital and insurance policies.

It takes special clearance to even trade contracts that are physically settled. Most of the time these contracts are just cash-settled instead.

Think of it this way - if you owned a share of Microsoft stock, and Microsoft suddenly owed someone a trillion dollars, you personally wouldn't be on the hook to pay it.

You own shares of the fund. Imagine it's like a company that makes a bad decision and loses all of its money. Maybe it ends up with debts greater than its assets.

Either way, you as an investor lost the entire value of your shares which are now worthless, so $0 is as low as your investment can go. You're not responsible for paying any of the company's debts if they exist.

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