[person_of_color]

Can someone ELI5 how energy trading works? I understand stocks, where you earn a portion of the company in return for dividends/capital gains, and options, where you bet on the underlying movements on stocks. But how does this work?

[wongarsu]

Say you own oil that will arrive in the port of Rotterdam in a month. You can sell it now, delivery date in a month. It's now essentially a virtual good that can be traded, but becomes physical in a month. Somebody who owns a refinery might buy it because they think prices will rise; or someone might buy it to sell it half a month later, allowing them to trade on the price of oil without going through the hassles of storing actual oil.

Then of course there are funds that just buy these futures, hold them for a while, sell them shorty before delivery and use that money to buy fresh futures. That way they can have a fund that closely tracks the oil price without having any physical infrastructure.

The catch is that at some point the oil turns real. So if you own oil bound for Rotterdam but can't actually receive any oil, you have to sell to someone who can take the delivery. If nobody wants the oil you might have to pay money to have someone take the oil, effectively creating a negative oil price.