Paper barrels are non-physical crude oil. Multiple “on paper” purchases and “off paper” sales of oil that has been or will be produced from an oilfield but has not yet been allocated a date when it will be loaded into a ship can be made for short-term hedging or speculative purposes.
What is a Paper Barrel?
Paper barrels are oil barrels that have been traded and exchanged on the open market but have never been physically transported. Of course, the oil will be delivered at some time, but it may have passed through several hands in paper barrels before you get your hands on it.
As one might think, trading in paper barrels may dramatically raise the price of oil, and when oil prices appear to be rising suddenly, many people believe that trade in paper barrels is to blame.
Understanding A Paper Barrel
Speculation in things that are only exchanged on paper and are never delivered is an old activity, as is transferring items without obtaining delivery. Commodity futures trading, such as pork bellies, wheat, and maize, has a lengthy history in many places.
Farmers pioneered futures trading by traveling to urban areas to acquire sales contracts for their crops prior to harvest. Many farmers agreed to early pricing in the hopes of ensuring a minimal return on their harvest, but they were also betting that the price of their product would not rise much.
The contract’s owner then has the option to sell it. Futures trading subsequently took over many markets, and the bulk of essential commodities, including oil, are now traded as futures. A paper barrel is nothing more than an oil futures contract that may be bought, sold, and traded for monetary benefit.
Oil futures contracts, like those for other commodities, are extremely speculative. Natural disasters, refinery problems, and estimates of restricted output can all cause price increases, while expectations of a surplus can bring price decreases. All paper barrel holders want to earn a profit, and very few intend to take a “wet delivery,” or true oil.
Because most oil futures trading occurs in financial firms, banks, and stock exchanges, those who participate in this activity know very little about the actual realities of handling and shipping oil.
Unless someone sells at a loss in order to avoid further losses, the price of a paper barrel rises with each transaction. Fuel prices can rise directly as a result of a spike in oil prices, which can occur when trading activity is strong and result in a rapid increase in the price per barrel.
Some say that government control of oil futures speculation is required to prevent inflation; others claim that such activity is inherent in a free market and that if prices go too high, the market will eventually bring them back down.
When the oil receives a loading date it is said to have “turned wet” or become a “dated cargo”; it has become physical oil; paper barrels have become wet barrels. The market for physical oil is much smaller than for non-physical oil. Physical oil is bought almost exclusively by companies intending to refine it into oil products.