Storage Arbitrage and Floating Storage
How traders profit from a contango oil market by buying now, storing the barrels, and locking in a higher sale price for later delivery — sometimes using tankers as the warehouse.
Prerequisites: Warehouse Receipts and Physical Delivery
When the futures curve for a commodity is in contango — future delivery months priced higher than spot — a trader can lock in a nearly risk-free profit by buying the physical commodity today, paying to store it, and simultaneously selling a futures contract for later delivery at the higher price. This is storage arbitrage: the trade only works, and only gets done at scale, when the price gap between now and later is wide enough to cover storage and financing costs with something left over.
When onshore storage tanks fill up, traders extend the same idea to floating storage — chartering oil tankers and simply anchoring them, loaded, for months, using the ship itself as a warehouse. This is far more expensive per barrel than a tank farm but becomes worthwhile when the contango is steep enough, as happened dramatically in April 2020 when oil demand collapsed and dozens of supertankers sat full at sea.
Worked example. Spot crude trades at $20/barrel while the 6-month futures contract trades at $28/barrel. A trader buys a tanker-load of crude, spends roughly $3/barrel on 6 months of tanker charter and financing, and sells the 6-month futures. Locked-in profit is 28 - 20 - 3 = \5$ per barrel, realized regardless of where spot prices move in between.
Storage arbitrage buys the physical commodity and sells a higher-priced future when the market is in contango steep enough to cover storage cost; floating storage is the same trade using tankers instead of tanks when onshore capacity runs out.
Further reading
- Reuters and IEA commentary on 2020 floating storage trade