What is Invisible Supply?
Invisible supply refers to the physical stock of a commodity which has not yet been quantified and is available to be delivered against the settlement of a futures contract. The supply is not quantifiable yet, as it has either not been gathered, segregated, or stored in a physical delivery facility.
The stocks of the commodities would be made available if the traders choose to settle futures contracts, but typically these futures contracts are just further traded or rolled forward before their expiry, and hence the stock continues to be an invisible supply.
How Invisible Supply Works in the Futures Market?
If physical stocks corresponding to a futures contract have not yet been aggregated or set aside, and hence cannot be quantified, it is referred to as invisible supply. This could be because the stocks are spread across multiple suppliers or because the stocks are currently in the ground, in tanks, in silos, in port storage facilities, or in manufacturer's storage facilities.
In case a trader decides to actually deliver, the trader needs to start aggregating and setting aside the stock corresponding to the futures contract in a separate warehouse, at which time it becomes visible supply.
At this point in time, the trader also typically procures a warehouse receipt or a certificate of shipping. This is proof that the stock has now been converted from invisible supply to visible supply. The site at which the commodity is being stocked is usually approved by a commodities exchange.
Example of an Invisible Supply
Trader X purchases a futures contract for the supply of wheat. Since the futures contract is long-term, the wheat is still being sown and will only be available in a warehouse in another four months' time. Hence, the wheat due against the futures contract is currently invisible supply.
