I did read about something that most of the people buying and selling commodities don't ever actually take possession of them. When they buy a future, they're saying they'll take possession on that future date. However, they sell the commodity before that date. If they're holding the commodity on the date the future comes due they have to take possession. Trump mentioned earlier that the Saudi-Russian pump war was going to have repercussions, and that there were currently tankers serving as warehouses because there was no place to offload the oil.
The example I read was soybeans, but it said a guy with an office, a desk a computer and a phone couldn't take delivery of 100,000 pounds of soybeans, so he would have to sell them at a loss.
Most of these guys put up a small percentage of the price as a deposit, and if it comes due and they haven't sold, they'e liable for the entire amount. So, a guy puts up $10,000 and buys $100,000 worth of oil futures at $50.00 a barrel. Only now, there's no place to store the oil, nobody is buying, and they can't take delivery cause they never intended to take possession.
Apparently, a lot of guys are prepared to pay for the entire price of the contract and offload the contract because they can't take delivery.
Anyone smarter than me on this, please make corrections.
I don’t know much about it but I think your explanation is a very good one. A negative futures price is basically the old “you’d have to pay me to take it off your hands”. The biggest problem with oil is it’s what is known as a “continuous process” where everything from pumping it out of the ground, carrying it thru pipelines and refining are all 24/7/365 operations (which is why planned downtime “turnarounds” and booms have such an impact). Compare that with a batch process like say, baking bread. If the market for bread diminishes you just keep mixing up the ingredients til it resumes, then you can start up the process almost right away. If you have to shut down a refinery it takes weeks to get it going again, and you can’t shut down a pipeline without shutting down pumping.
In fact that’s why we read about milke being dumped during the Great Depression, cows didn’t care that the bottom had fallen out of demand and price.