I have never taken physical delivery of any Commodity---but his assertion is that there is very little speculation in Oil b/c after 29 days the buyer has to take physical delivery. Intuitively, there is something wrong with that argument b/c many CL participants are not taking physical delivery. My thoughts are they just rollover their contracts to the next trading month in a sophisticated manner to avoid huge drops in the price while they are repositioning. But I am interested in some traders who know the mechanics of the CL Futures Physical Delivery System and Rules to understand how much credence to put in RS`s argument. I know it is wrong, b/c hedge funds don`t take physical delivery and they have been big players in this move up, so how are they doing it without taking physical delivery? It seems if nothing else, there is a lot of "collusive positioning and cordinated buying and selling" to accomplish this feat if the physical delivery constraint is as predominant a barrier to market speculation as RS thinks it is! THOUGHTS?
You can take delivery if you control the underlying as well. Buy and deliver, buy and deliver, to yourself...... Sell a little of the juice at spot and you are golden.
What RS said makes sense, because if the futures get too far ahead of the cash market it becomes very easy to make money. Lets say the futures are at $130/barrell due to "all the hedgefunds" buying them on "speculation." The cash market is trading at the "fundamental" price of $90. It would be very easy for someone to sell the futures contracts to all "speculators" hold the contracts until delivery and buy and deliver the oil on the cash market. It should in fact drive the price of the futures down and the price of cash up, until this is no longer profitable. 5yr
http://www.nymex.com/CL_spec.aspx Settlement Type: Delivery Check out section 200.15 of this link http://www.nymex.com/rule_main.aspx?pg=32 If you have an open CL position at the end of the last day of trading, you will be making or taking delivery. If you don't want to be involved in physical delivery, close out your position prior to the end of trading of the contract.
Isn`t the Future market setting the price for the spot market/cash market? Are the spot market and the cash market the same thing just different jargon, right? I thought the future market sets the price for the spot market to some degree. Is the physical delivery system for CL any different from that of wheat which bubbled up? What are other possibilities, how do commodity indexes take physical delivery? Are the commodity indexes and ETF`s "wharehousing" crude to account for investment dollars pouring into these financial vehicles, thus artificially taking supply off the market? If so, where do they store all this oil.....and what are their carrying costs?
is crude like any of the other ags where as long as the month is in delivery yo can actually be called to deliver? or is it just last day?
The delivery facilities in Cushing are very limited. They could not withstand even 10% of open NYMEX interest. The cost to deliver physical oil is huge as well. There are only a handful of financial firms with the capital and expertise to deliver physical oil. You simply do not look in the Yellow Pages to find out how to secure storage and pipeline capacity. Also, ICE WTI contracts are not even deliverable. They settle against NYMEX.
In Minneapolis wheat, delivery can take place in the form of warehouse receipts. I've made delivery and taken delivery many, many times over the years. Delivery is pretty easy in the ag markets, and presents very interesting trading opportunities. http://masteroftheuniverse.wordpress.com/
The crude futures market maybe at one time was a physical delivery market, but it has taken on the character of a paper traded market like a CROX market cap to some degree, we all knew Crox didn`t have that REAL size of market cap, it was paper market cap, il has been, especially with this last 35 dollar move, a purely paper market (whether electronically dominated or not) based upon paper profits where physical delivery is not the driving factor. The question is will regulating the ice exchange with the CFTC help modify some of this paper trading premium we now have in oil according to my hypothesis?