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Futures

Some story on Reddit about some people getting gas cheap because they bought retail futures.

Here's the problem with futures like this -- if you reserve your gas today for ten years from now, at today's price, from seller A, there are two probable outcomes-

-in ten years gas is close to or cheaper what you paid. You yield no benefit.

-in ten years gas is much more expensive. Person you gave all your money to goes bankrupt. You yield negative benefit.

It is a sucker's proposition. While there are stories where it works, fundamentally it is a pyramid scheme: Where it keeps going it's on the backs of new purchases against the future. That is not sustainable.
Permalink df 
September 1st, 2012 1:19pm
I read in the paper about a guy who did this - must have been 5-6 years ago.

He bought a future for $6500 on retail diesel for his small business' trucks.

I expect there are people who do this, and the price moves in the opposite direction, meaning their future was wasted (retail price was lower than what they paid for). But their bad bet doesn't get reported on by the media.
Permalink Send private email xampl9 
September 1st, 2012 3:30pm
But in effect it's just insurance ?

Surely you buy your future contract from some huge financial organization that *will* be around and when the time comes they just pay you the difference between the retail price now and the contract price for however many gallons the contract was for?

You can probably choose whether you pay them in the event the fuel is cheaper than the contract price, clearly that would reduce the cost of the contract.

Not sure this is the right kind of future but I think there are people from the right industry on CoT who can educate us :)

http://en.wikipedia.org/wiki/Contract_for_difference
Permalink Heroic Hacker 
September 1st, 2012 4:33pm
Typically, you'd buy it from the petroleum distributor (not the gas station, but the guy who supplies the stations)
Permalink Send private email xampl9 
September 1st, 2012 7:44pm
Yeah, that's stupid because they might indeed be out of business.

In any case they will just have laid the risk off somewhere else by buying forward or aggregating and buying a suitable future themselves, and then charged you a premium.

Only makes sense if you are too small to do it yourself and there is something backing it up if they go under (trade org like ABTA or whatever..)
Permalink Heroic Hacker 
September 2nd, 2012 6:35am
wikipedia "A sucker bet is a gambling wager in which the expected return is significantly lower than the wager(s)."

Is this a suckers bet?
Permalink lemonhead 
September 2nd, 2012 7:01am
Is putting your money in a savings account a sucker bet?
Permalink Attila 
September 2nd, 2012 7:35am
No.
Permalink lemonhead 
September 2nd, 2012 7:37am
Funny.  I thought a "Sucker's Bet" is a bet which you're told has a high chance for winning, but in fact has a much lower chance (perhaps NO chance) of winning.  Only suckers fall for it, is the idea.

You know, like people who buy into the Lottery.
Permalink SaveTheHubble 
September 2nd, 2012 8:10am
That matches the definition per wikipedia.

Although they may note be good financial moves, neither savings accounts nor pre-buying gas fit that.
Permalink lemonhead 
September 2nd, 2012 11:12am
In effect it's just insurance, and medium-sized trucking companies do it all the time.  Moving down to the retail level is a new wrinkle, but no big deal.
Permalink hoyza 
September 3rd, 2012 12:25pm
Exactly.  Nor is it a pyramid scheme.  If you contract with me for fixed price future gas, I can buy the gas today and store it for you.  No pyramid required.
Permalink lemonhead 
September 3rd, 2012 8:57pm
Nonsense.

If someone buys 40,000 gallons for 2020 at today's prices, you'll just "store it" for them? For real?

Secondly this is micro-level retail shops. Essentially _gas stations_ taking these bets. They are not taking offsetting bets, but are essentially shorting fuel futures. That is _insane_. Flippantly pretending it's no big deal is inanity. It's an idiotic investment.
Permalink df 
September 3rd, 2012 9:23pm
>>Secondly this is micro-level retail shops. Essentially _gas stations_ taking these bets. They are not taking offsetting bets, but are essentially shorting fuel futures. That is _insane_. Flippantly pretending it's no big deal is inanity. It's an idiotic investment.

Wait... what if those micro level retail shops used the received money to actually short gas futures?  Wouldn't that offset the losses from falling gas prices?
Permalink Kenny 
September 4th, 2012 11:54am
Shoot.. I mean just buy gas futures, not short them.
Permalink Kenny 
September 4th, 2012 11:55am
*They* don't have to take offsetting bets, they just have to place the risk with someone else and aggegate and take a small profit on the cost of the insurance?

The only problem as you rightly say is them going out of business and not honoring the deal. no?
Permalink Heroic Hacker 
September 4th, 2012 1:18pm

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