It's simpler: people who were long oil make money (on paper) and those who were short oil lose money (on paper).
You were long oil if you are an oil producer, or, e.g., if you owned oil futures. You were short oil if you are an oil consumer, or, e.g., if you had sold oil futures. If you are both (e.g., airlines might hedge future oil consumption by buying futures, and producers might hedge future production by selling away their future production), then you need to net it out across the futures curve.
Price responses to supply shocks in theory serve to allocate resources appropriately (e.g., if your consumption did not matter that much, you might curtail it); if another person's consumption is more productive (i.e. profitable), then they're likely to eat the input cost and still buy it. In the long run, you might hope that high prices lead to more investment in producing the scarce good, or in more hedging activity to prevent future harms. The net effect of (long) hedging activity is generally to slightly increase the future price because folks buy futures / futures options, and market makers, in addition to selling the option, buy the underlying to remain market neutral. This potentially increases future supply because it can, in theory, push up the futures price, or estimates of future price, which can make new resource extraction economical.
Unfortunately, today, given the degree of inequality, it is mostly poor people whose consumption is curtailed when there are supply shocks. This is consistent with the above interpretation: the implication of wealth inequality is that the poor people matter less and are less productive to the capitalist machine. As a real example of this, the oil price would likely be higher even, if the oil consumption of Southeast Asian countries had not decreased because they could not afford the higher prices. This is the great thing about inflation in a highly unequal society: it is partially tempered because demand goes away as prices rise.
Note that the amounts of money involved here are not equal, companies respond to price movements and expected price volatility with less efficient behavior, so the volatility itself causes economic losses.
Like, there's a trade you can do where you load up an actual tanker with oil, park it, and sell an option to buy that oil. The cost of using this tanker and holding this oil a pure waste compared to just having a market-clearing quantity available at a consistent price at all times, but if the market is scared enough it makes money.
That trade works when the market is in steep carry, usually a result of depressed prices.
That trade does not work today when the market is very inverted: you buy the spot oil, and sell a call in the future. But the term structure is pricing lower oil prices in the future. You take that hit on your spot cargo.
That trade only works if you are bearish the curve and bullish flat price. And if you have this view, it's just about the worst possible way to structure that trade.
The cure for high prices is high prices. Curve inversion ensures that anyone with oil today is incentivized to sell it asap.
The point is that the most efficient ways to physically handle oil products happens when prices are stable and predictable. I could have just as easily talked about the expenses involved in keeping a profitable-only-at-higher-price field on operational standby as a real option on oil prices, or increased shipping costs as localized price changes shuffle trade routes, etc.
jsrozner · · focus · HN ↗
You were long oil if you are an oil producer, or, e.g., if you owned oil futures. You were short oil if you are an oil consumer, or, e.g., if you had sold oil futures. If you are both (e.g., airlines might hedge future oil consumption by buying futures, and producers might hedge future production by selling away their future production), then you need to net it out across the futures curve.
Price responses to supply shocks in theory serve to allocate resources appropriately (e.g., if your consumption did not matter that much, you might curtail it); if another person's consumption is more productive (i.e. profitable), then they're likely to eat the input cost and still buy it. In the long run, you might hope that high prices lead to more investment in producing the scarce good, or in more hedging activity to prevent future harms. The net effect of (long) hedging activity is generally to slightly increase the future price because folks buy futures / futures options, and market makers, in addition to selling the option, buy the underlying to remain market neutral. This potentially increases future supply because it can, in theory, push up the futures price, or estimates of future price, which can make new resource extraction economical.
Unfortunately, today, given the degree of inequality, it is mostly poor people whose consumption is curtailed when there are supply shocks. This is consistent with the above interpretation: the implication of wealth inequality is that the poor people matter less and are less productive to the capitalist machine. As a real example of this, the oil price would likely be higher even, if the oil consumption of Southeast Asian countries had not decreased because they could not afford the higher prices. This is the great thing about inflation in a highly unequal society: it is partially tempered because demand goes away as prices rise.
ThrustVectoring · · focus · HN ↗
Like, there's a trade you can do where you load up an actual tanker with oil, park it, and sell an option to buy that oil. The cost of using this tanker and holding this oil a pure waste compared to just having a market-clearing quantity available at a consistent price at all times, but if the market is scared enough it makes money.
qeternity · · focus · HN ↗
That trade does not work today when the market is very inverted: you buy the spot oil, and sell a call in the future. But the term structure is pricing lower oil prices in the future. You take that hit on your spot cargo.
That trade only works if you are bearish the curve and bullish flat price. And if you have this view, it's just about the worst possible way to structure that trade.
The cure for high prices is high prices. Curve inversion ensures that anyone with oil today is incentivized to sell it asap.
ThrustVectoring · · focus · HN ↗