Forgive me if this is a stupid question but they can’t hold a gun to your head to force you to take the oil, right? Can’t you just refuse the delivery if you have nowhere to store it? Is there language in the contract for this kind of situation?
Once delivery is made you are now on the hook for the storage costs - which are going sky high because there is no available storage inventory. You can default on your obligations to the storage company, but they will sell off whatever oil you hold to cover debts and then sue you for the rest.
When the market is functioning correctly you end up paying for a few days of storage while the oil is diverted to a pipeline where you can extract it, or it is offloaded on to your train/truck/tanker/etc.
This has never happened before, so I don't know how it will play out other than that it's going to be wildly messy. Probably far messier than anyone, myself included, is imagining.
Would it be possible to simply pump the oil back into the ground wherever the closest oil field is?
This is being discussed:
"The U.S. Energy Department is negotiating with nine companies to rent about 23 million barrels of oil storage capacity in its Strategic Petroleum Reserve as part of a Trump administration bid to help drain the country’s growing glut of crude."
https://www.worldoil.com/news/2020/4/14/doe-working-to-lease...
Here is what the US Strategic Petroleum Reserve looks like (it can absorb some of our over-supply briefly):
> Four underground salt caverns on the coast of the Gulf of Mexico store the oil. That's a central location. The oil can be distributed to nearly half of the U.S. oil refineries either through interstate pipelines or via barges. It only takes 13 days for the oil to enter the U.S. market from the time the president first gives the order.
> There are two cavern locations in Texas. As of September 30, 2018, Bryan Mound held 235.3 million barrels in 20 caverns. Big Hill held 153.4 million barrels in 14 caverns. The other two are in Louisiana. West Hackberry held 199.5 million barrels in 22 caverns. Bayou Choctaw held 71.88 million barrels in 6 caverns.
> The maximum capacity of all four caverns is 727 million barrels.
There is also a good FAQ on it:
https://www.energy.gov/fe/services/petroleum-reserves/strate...
The workaround is to cheaply rent out the reserve as storage space, with the hope that someday a better congress will allow purchasing the oil.
Why should the American people pay to fill it when they can now be paid instead to store the oil? The market's decided that the toxic asset needs to go somewhere and the speculators that bought it (not the producers) will pay.
>The workaround is to cheaply rent out the reserve as storage space
Cheaply? They took a risk in speculating and it didn't work out. The solution is to give them a choice: surrender their oil to the USG (to avoid paying storage fees) or pay the USG for the service of storing it.
No bailouts, fuck that.
But we have speculators who sold us the idea that their profits brought stability to the market, so make them keep playing by their own rules.
It's not a bailout. Prices were negative! We'd literally be _getting paid_ to take oil and put it into our reserve. It's literally the easiest financial decision on the planet.
The fact that Pelosi blocked it demonstrates a fundamental lack of understanding of basic finance.
Inventory of 635 million barrels. [2]
635/717 = 88.5%
[1] https://en.wikipedia.org/wiki/Strategic_Petroleum_Reserve_(U...
Anyone not filling any available storage is a huge idiot.
In crux, thanks for asking :)
https://www.mlive.com/news/2016/01/michigan_has_most_undergr...
Also there's some underground cave like structures East of Grand Rapids where they store fuel as well.
That sounds incorrect. The whole point of having standardized, commodified units trading on organized exchanges is that you don’t have to reinvent the dispute-resolution wheel — or turn it over to super slow courts — for every foreseeable thing that can go wrong. So there should be a specific procedure and penalty you can look up.
I asked the same question and got this answer that seems more correct and along the lines of my intuition, that the exchange holds it (or rather, directs others to home it) and bills your account for the cost:
[1] https://www.cmegroup.com/content/dam/cmegroup/rulebook/NYMEX...
On the other hand, people who draft contracts for big corporations get to talk to risk analysts and ask "if we agree to this, what might go wrong that causes us to lose money?" and write clauses that generally protect them from that risk.
It's times like these that those contract clauses protect you, in a big way.
Basically, the people holding the contracts have to either sell at a negative price to cover, pay to take delivery, or give up cash collateral that's worth even more money than the previous choices.