For example, oil that is held by a country for resources for crises is not considered part of the economically deliverable supply of oil futures contract. Another example is grain of a farmer.
Assume that a portion of the grain is held by the farmer for his own cattle. This portion is not economically deliverable because it is captive and so unavailable for delivery as a part of a futures contract.
The deliverable supply consists of the captive portion and of the portion that is part of the futures contract. Therefore, the economically deliverable supply is always equal or less than the deliverable supply.
The economically deliverable supply can explain in comparison with the deliverable supply futures price reactions. When it is significantly less than the amount needed to fulfill the short position of a contract, the futures price may increase.
That is the reason why futures contracts are closed nearby the delivery month. For example, the holder of a long position can close his position with a countertrade and realize profits because of the risen price.
|Economically Deliverable Supply|