Jrbarnes

Why It's Crucial to Reduce Leverage in Oil

I am in the oil business, and when I hedge, I do not take possession of the oil that I do a futures contract on, nor do I ship my production to Cushing, Oklahoma where contracted oil is stored, nor do other oil companies that I know. If my oil does not sell for the price that I hedge it for, I sell it at market where it is, and make up the difference with the profit or loss from my hedge that month, with the net result being that I net the price that I hedged, thus keeping my bank happy. Similarly the buyer of oil who hedges, does not normally take possession of the oil in Cushing, but buys it in the normal course of his business, using the profit or loss on his hedge to end up with the net price hedged.