What do we have 8.2 million more this week than last week?

[dismal]

In a futures market you lock in the price you're going to sell it for in the future today. It doesn't actually matter what the market price is at the time.

Is this a contract to buy at that price, or an option to buy at that price?

In this case it's a contract that requires you to sell at a fixed price.

You buy oil today at $50, you stick it in storage, you sell it forward today for delivery in Feb 2016 at $55. You've locked in $5 bucks of margin. Your big risks are credit (i.e., the guy who agreed to pay you $55 is a no show when oil is $41, which is mitigated by nymex collateral requirements) and your oil storage blowing up (which is mitigated by insurance).

 

[arkirk]

42 gallons is a barrel of oil. But seriously they don't actually put in in barrels anymore. That's probably packaged lubes or some other product.

Oh . . . you dirty dawg!

Just what kind of " lube" do you think he's talking about? This is a rare case of dismal being right. Actual barrels are used for processed product. Crude spends its life in big storage tanks. The truth is that when the price is artificially low, the refiners can still control how much usable product is available and increase the margins. No restraint of trade issues arise as long as the refiners agree to the sweetheart deal and don't overproduce. As long as it is crude, it still has to pass through the gate keeper industry.

 

[Bronzeage]

Is this a contract to buy at that price, or an option to buy at that price?

In this case it's a contract that requires you to sell at a fixed price.

You buy oil today at $50, you stick it in storage, you sell it forward today for delivery in Feb 2016 at $55. You've locked in $5 bucks of margin. Your big risks are credit (i.e., the guy who agreed to pay you $55 is a no show when oil is $41, which is mitigated by nymex collateral requirements) and your oil storage blowing up (which is mitigated by insurance).

What does it cost to store a barrel of oil? I assume there some kind of volume discount.

 

[dismal]

L

In this case it's a contract that requires you to sell at a fixed price.

You buy oil today at $50, you stick it in storage, you sell it forward today for delivery in Feb 2016 at $55. You've locked in $5 bucks of margin. Your big risks are credit (i.e., the guy who agreed to pay you $55 is a no show when oil is $41, which is mitigated by nymex collateral requirements) and your oil storage blowing up (which is mitigated by insurance).

What does it cost to store a barrel of oil? I assume there some kind of volume discount.

Not a simple question. If you have a tank the variable cost is minimal. Your main cost will be the logistics of getting it in and out. If you don't have a tank you're not going to get one permitted and built in time to take advantage of the market. But the cost per bbl is very much cheaper if you build a bigger one. Once they are built they last decades.

In a normal market you can enter into a contract to lease space at rates that will vary depending on how tight capacity is at the location. i don't know off the top of my head what a contract would have cost you at Cushing 6 months ago per barrel per month. Now I imagine it will be priced to reflect what other people or even the tank owner could make himself off the contango.

Most of the time there is not much incentive to store oil. Some amount of inventory is needed for operations of refineries pipelines etc but "just in time inventory" became the mindset long ago. They want as little as possible. Other tank owners offer merchant services and blending options. These sorts of contango plays come up every once in a while and they reap benefits on ant uncontracted space they have, but they aren't really planned for.

 

[dismal]

I was just looking at some material that said the typical Cushing storage contract lease rate was about $0.40 per barrel per month and Gulf Coast was about $0.65. With much higher walk up rates.

I would guess those rates would be impossible to get right now though.