Since it is a "hard" commodity, don't they have to mail it somewhere overnight or weekend? Granted by time it arrives elsewhere it can go up or down, just seems to be too much risk. Please explain why energy companies go broke when their commodity goes higher? Am very interested in your reply. I trade good amount of commodities, to me they are just symbols without an indentity, just like playing video poker waiting for the royal flush.
There is not a single company out there that has outright price risk. They rather hedge their inventory with forwards and make a profit of trading the basis. The problem is that physical inventory is not collateral for financial instruments, they need cash to margin their hedge...which they usually get from selling the physical product. So when commodity prices rise, demand slows down so they get less cash. In addition they are down on their hedge so they need additional cash to back up their position. This creates a double whammy that blows them out of the water as soon as cash reserves approach zero.