What Is 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 amount 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 considered "invisible."
- Invisible supply is the physical stock of a commodity that will eventually be available for delivery upon settlement of a futures contract, but which is not yet accountable in the supply chain.
- These supplies are instead still located in the ground or in storage.
- When a futures contract demands physical delivery, shorts must collect from the invisible supply to make it visible, so to speak, for the long.
How Invisible Supplies Work
The supply of a commodity that has been readied for delivery is considered visible because 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, and so on—are thus considered "invisible."
However, these stocks of commodities are able to be obtained for delivery should traders who are short—meaning when a trader sells a security first with the intention of repurchasing it or covering it at a future, lower price—of these commodities chooses to physically settle futures contracts to those with long positions (i.e., the buyers), instead of offsetting or rolling forward the contracts before their expiration dates.
In the vast majority of cases, the 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 then 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.
As the market prices are determined by the laws of supply and demand, the invisible supply speaks to the future physical delivery of items such as wheat or oil in theoretical terms, since it is not yet accounted for but is factored into futures contracts.
Visible vs. Invisible Supply
Visible supply stands in contrast to invisible supply, which refers to an unknown or unquantifiable amount of physical stock of a commodity that will eventually be available for delivery upon settlement of a futures contract.
Visible supply is the amount of a good or commodity that is currently being stored or transported that is available to be bought or sold. This supply is important as it identifies a definite quantity of goods available for purchase or delivery upon the assignment of futures contracts. For instance, all of the wheat held in granaries or storage facilities, along with the wheat being transported from farms constitutes part of the visible supply.