DEFINITION of 'Invisible Supply'

Invisible supply refers to an unknown amount of physical stock of a commodity that will eventually be available for delivery upon settlement of a futures contract. This quantum of supply underlying a futures contract exists, but it hasn't yet been gathered, stored and set aside in identifiable physical facilities for delivery. Any such stock of commodity that has been accounted for is "visible" supply. Supply not accounted for, in connection with a particular futures contract, is invisible.

BREAKING DOWN 'Invisible Supply'

Supply of a commodity that has been readied for delivery is visible. It has been stored and recorded. All other supplies, wherever located - in the ground; in producer storage silos or tanks; on delivery trucks, trains or shipping vessels; at port warehouses; at manufacturers' storage facilities - are "invisible"; however, these stocks of commodities will be obtainable for delivery should traders who are short these commodities choose to physically settle futures contracts to those with long positions (i.e., the buyers) instead of offsetting or rolling forward the contracts before their expirations. In the vast majority of cases, physical delivery of commodities does not take place under futures contracts. However, when a trading firm decides to fulfill delivery, it must begin pulling together the invisible supply to make it visible, so to speak, in a warehouse for the buyer. The trading firm also must procure a warehouse receipt or shipping certificate that will serve as proof that it has made the commodity "appear" at the physical site. The physical site will be approved by a commodities exchange, or a self-regulatory organization (SRO) such as the Chicago Mercantile Exchange (CME). The party that is long the futures contract will pay the trading firm for the commodity and take possession of the now-visible supply at that storage facility.

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