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What happens if someone is forced to take physical possession of many barrels of oil that they bought on the open market, but they have no storage space left to put it?

ETA: In jeffronicus answer below, the buyer has options on how to accept the oil. This question aims to find out what happens if the buyer is out out of options. All space is full. The storage where the oil currently sits is contracted to someone else so they insist on delivering the physical possession of the oil.

Another clarification: The scenario is that the price of oil has crashed to the point where storing the oil is more expensive than the oil.

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    Then they have a problem, but they can decide what to do about it. You should propose a response and ask what the consequence would be under the law. – user6726 Apr 21 '20 at 14:41
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    If they are forced to take possession, that means they are one of the sides of a "futures" contract. The contract should guide this eventuality. – grovkin Apr 21 '20 at 14:55
  • What may happen is that what you take possession of is not physical oil, but rather a document that states that you own a certain number of barrels at some storage facility. In that case, you want to get rid of the oil not because you cannot store it, but because you do not want to pay the storage costs for the months and months it may take to find a buyer at an appetizing price. – Rodrigo de Azevedo Apr 23 '20 at 14:27
  • @Rodrigo - In the hypothetical, I don't sign the document. If it is delivered to me I put a match to it. – IKnowNothing Apr 23 '20 at 14:35
  • @user6726 I proposed an answer – IKnowNothing Apr 23 '20 at 14:46
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For example, per the New York Mercantile Exchange Rulebook, there are several methods for accepting delivery of light sweet crude oil futures, including just recording new ownership of product that's already sitting in a storage tank:

At buyer's option, such delivery shall be made by any of the following methods: (1) by interfacility transfer ("pumpover") into a designated pipeline or storage facility with access to seller's incoming pipeline or storage facility; (2) by in-line (or in-system) transfer, or book-out of title to the buyer; or (3) if the seller agrees to such transfer and if the facility used by the seller allows for such transfer, without physical movement of product, by in-tank transfer of title to the buyer.

There are also provisions for negotiating alternative delivery procedures.

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  • I assume then the storage facility would then charge the nominal owner the storage costs? – xngtng Apr 22 '20 at 10:36
  • @zhantongz Yes, the buyer has to have made some sort of arrangement with the storage facility. The rulebook specifies that the seller only has title and liability up to the "point of connection" to the buyer's pipeline or storage facility. – jeffronicus Apr 22 '20 at 14:48
  • That you for the good answer. I will use it to make the question better. – IKnowNothing Apr 23 '20 at 13:47
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The futures are settled at Cushing Oklahoma so there is always space.

These details are agreed on before hand. If they aren't then the contract isnt valid or meaningful.

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  • But there must be some standard wording what the penalty would be for refusing to come get your oil. – IKnowNothing Apr 21 '20 at 16:29
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    Could you please elaborate on what you mean by "there is always space"? – Rodrigo de Azevedo Apr 21 '20 at 18:16
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    @raham the "real problem" you describe is precisely what futures traders anticipated would happen on April 20, 2020 and what is contemplated by the question. That is why the lowest price ever (negative $30ish per barrel) occurred on that date. Every pipeline, storage facility, ship and truck can be full and that is what is very close to happening right now. – ohwilleke Apr 21 '20 at 23:56
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    recent local headline -- Cushing Oil Storage Running Out Of Space As Prices Plummet Tuesday, April 21st 2020, 5:56 PM CDT Updated: Tuesday, April 21st 2020, 6:16 PM CDT By: Storme Jones – George White Apr 22 '20 at 4:27
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    @Criggie - It was the OP, raham who said Cushing would never be full. – George White Apr 23 '20 at 18:07

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