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by mil22
52 days ago
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Yes, there are physically settled and cash settled futures. The futures price converges to the settlement price (tied to spot) as the expiration date approaches. Futures are marked to market every day and gains and losses are paid out daily in cash. So in the example you gave, you would have received $500K profit between when you bought the futures at $1M and when they expire at $1.5M. For cash settled futures that's the end of the story - a final small adjustment happens, in cash, your position disappears, and that's it. For physically settled futures, the story is the same, but on the day of delivery, you (as the buyer) would be required to pay $1.5M cash to receive the oil, and whoever held the other side of the contract (as the seller) would be required to deliver it to you at some named location, typically a storage facility. Who loses the $500K? The seller (who was short the contract) has been paying the losses daily as the price moved against them. The payments are handled through the exchange/clearinghouse and their brokerage. What if they can't deliver? The exchange steps in and provides guarantees. |
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Ordinarily I'm sure such "guarantees" are enough, maybe for 10% above spot price we can get enough oil to my refinery to make that fuel and the exchange is able to cover this cost from their operating budget. But when the deliveries don't even resemble sold futures that stops working, that oil isn't available at any price and so those "guarantees" become worthless.
This is the other end of the problem the ETFs had last time. The ETFs couldn't go negative because an ETF is just paper so if my ETF had a notionally negative value I don't pay I just tear up the ETF instead whereas the notionally negative value of an oil delivery was like yeah, this is nasty toxic black sludge, you're going to need to put that somewhere.
The other end is that ETFs aren't actually oil, if I have an ETF but I need diesel that's not a thing you can make from the ETF. Even if my ETF tracked the price perfectly, I still don't have diesel, I need to find somebody who wants to sell the diesel and maybe if supplies are tight that's not one of the options.