Sowing the seeds of demand destruction

Quote from ByLoSellHi:



3) There is a shortage of oil (there's not; speculative buying has locked up oil, taken it off 'the market,' and prevented physical deliveries, thus creating the 'draw downs' that have fueled supply concerns)

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how does this prevent deliveries? i.e. where does the physical go then? I am confused a little about what you are saying here. the hedgies, etc are holding to expiration and storing the oil?

i do agree there is enough supply, anyone can get what they need, although they have to pay the market price for it.
 
Quote from Jayford:

how does this prevent deliveries? i.e. where does the physical go then? I am confused a little about what you are saying here. the hedgies, etc are holding to expiration and storing the oil?

i do agree there is enough supply, anyone can get what they need, although they have to pay the market price for it.
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They roll the contract to the next month, pushing back the delivery on that contract. It doesn't prevent delivery per-se, but it changes the delivery logistics when the producers know such an amount will never have delivery taken, but at the same time the contract might be called so they have to be ready to deliver.
 
Quote from Jayford:

how does this prevent deliveries? i.e. where does the physical go then? I am confused a little about what you are saying here. the hedgies, etc are holding to expiration and storing the oil?

i do agree there is enough supply, anyone can get what they need, although they have to pay the market price for it.
More...

What karl said, plus -

http://www.elitetrader.com/vb/showthread.php?s=&threadid=129756

"As of yesterday, 320M of the 370M barrels that were "needed" on the NYMEX for July delivery were cancelled ahead of today’s contract expiration. Those "needs" were rolled into August (300Mb), Sept (132Mb), Oct (69Mb), Nov (49Mb) and Dec (187Mb), although the entire strip dropped like a rock. There are still months in 2011 and 2012 where no trader has purchased a single barrel since oil was at $70. If there were legitimate hedging going on, don’t you think airlines or FedEx (FDX) or UPS would have thought they would need barrels in 2011 and 2012 or were those years they are planning on not delivering any packages?

This whole thing is an evil, criminal farce - it’s a con ..."
 
anyone have any data on the percentage front month contracts canceled at expiration now vs a few years ago?

I know vol is way up, just curious to see if the % taken for delivery is significantly different.

based on 320/370, only 13.5% was actually taken for delivery for example.

just curious.
 
Quote from Jayford:

anyone have any data on the percentage front month contracts canceled at expiration now vs a few years ago?

I know vol is way up, just curious to see if the % taken for delivery is significantly different.

based on 320/370, only 13.5% was actually taken for delivery for example.

just curious.
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I don't have figures, but I suspect that the percentag resulting in delivery is relatively constant. The futures delivered should reflect the amount that has been hedged by commercials on both sides of the trade.

Like your, I still don't have a clear picture of how longs who "offset" prevent physical delivery. Spec longs sell out their positions to spec shorts, neither of which want to be involved with physical delivery. This has always been a part of the futures trade in oil.

The only recent change to the market participant land scape is the development of OIL ETF's. Presumably when oil shares are bought, the fund managers executes equivalent long futures positions? The 64 cent question is how these positions are liquidated. I have to believe these positions get offset in the same way other long speculative positions are.

I think we can fairly assume that commercial participants (producers / consumers) only hedge a portion of their needs (depending on price expectations). Position limits (as well as margin levels) appear to be the primary mechanisms to prevent excessive speculation.

One of the mis-conceptions is that there are large storage depot's where oil can be parked for extended periods of time. Shut down the Houston ship channel (or the Missippi river) for more than a couple days and refineries start to plan for potential shutdowns (which they hate to do). The tanker trade exhibits seasonal product patterns which confirm that longer term storage is not a common facet of US oil markets.

In general, I believe that no one (commercial producer or consumer) wants the financial risk of holding a static inventory.

Here is a link to the NYMEX rulebook regarding Light Sweet Crude Delivery:

http://www.nymex.com/rule_main.aspx?pg=32
 
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