January 14, 2013

Why Oil Futures Need Physical Delivery

Why Agriculture and Oil Futures markets need physical delivery.

photo: VMT

EconMatters on why physical delivery should be required in the oil and agriculture futures market. 
The only real market principles are based upon who is using the product, i.e., who needs the commodity to actually take or provide physical delivery. I know what a novel idea, actually using futures contracts the way they were originally intended. But this is something that modern societies must enforce through necessary market reforms. You would find out real quick what the true market price is for many of these necessary commodities by making players take or provide physical delivery.
Ergo, the next time Barclay’s believes that Brent should be 120 for their price target, let them buy a whole bunch of Brent contracts, and take delivery at a storage facility near them. Moreover, the next time Goldman Sachs says that oil is going to 200 dollars a barrel, ok, thanks for the info Goldman Sachs, now put your storage facilities to good use because the CME and NYMEX have a whole bunch of oil to deliver to your facilities.
This market reform of requiring physical delivery would bring back true market dynamics of pure supply and demand principles, and take out the paper pumping nonsense which is so reflective of many markets today and leads to markets deviating severely from the fundamentals and being wholly mispriced.

Meanwhile take a look at who is shipping shale oil in rail cars.

Tags: physical delivery for oil futures, physical delivery for cotton futures, who is shippinig shale oil