Key takeaways
- The value of storage is set by the forward curve: contango makes tanks valuable, backwardation makes them a cost.
- The 'carry' is the cost of holding oil — storage, financing and insurance; storage pays when the contango exceeds it.
- In steep contango, demand for capacity surges and storage rates rise; the two markets move together.
- Understanding this is essential to timing storage commitments and reading capacity availability.
A storage tank does not create oil or refine it; it moves oil through time. And whether moving oil through time is valuable or costly depends entirely on the shape of the forward price curve. This is the economics that sits beneath the entire storage business: the reason tank capacity can be worth a fortune in one market and sit idle in another, and the logic that every serious storage customer must understand. It comes down to two words — contango and carry.
The forward curve: contango and backwardation
Oil trades not only for prompt delivery but for delivery months and years ahead, and the relationship between these prices defines the market's structure. In contango, forward prices are higher than prompt prices — the market pays more for oil later. In backwardation, prompt prices are highest — the market pays a premium for oil now. This shape is not academic: it directly determines whether holding oil in a tank makes or loses money.
The cost of carry
Holding oil is not free. The cost of carry bundles the three costs of keeping a barrel in storage over time: the storage cost (the tank tariff), the financing cost (the interest on the capital tied up in the oil), and the insurance cost (protecting the value held). Add these together and you have the total cost of moving a barrel from now into the future. Storage is profitable precisely when the market pays you more than this to wait.
The storage arbitrage in four steps
The storage arbitrage
When the market is in contango and the contango exceeds the cost of carry, a clean trade appears: buy oil now at the low prompt price, sell it forward at the higher future price, store it in between, and pocket the difference less the carry. This storage arbitrage (or cash-and-carry) is why steep contango sends traders scrambling for tank capacity — the tank becomes the instrument that captures a locked-in, low-risk spread. It is also why storage rates themselves rise in contango: as demand for capacity surges, terminals can charge more, until the rising storage cost erodes the very arbitrage that created the demand.
| Market shape | Prompt vs forward | Effect on storage |
|---|---|---|
| Contango | Forward > prompt | Storage valuable; demand and rates rise |
| Steep contango | Forward >> prompt (exceeds carry) | Cash-and-carry arbitrage; scramble for tanks |
| Backwardation | Prompt > forward | Holding oil costs money; storage demand falls |
| Flat | Prompt ≈ forward | Storage driven by logistics, not arbitrage |
How market structure drives storage value
Why this matters even to non-traders
Even customers who never run a cash-and-carry trade are affected by this economics. When contango is steep, capacity is scarce and expensive, and a distributor or refiner competing for the same tanks will pay more — or find none available. When the market is backwardated, capacity is plentiful and cheap. Reading the forward curve therefore helps any storage user time their commitments, understand why rates move, and appreciate why securing term capacity ahead of a contango move is so valuable. Storage economics is not just for arbitrageurs; it is the weather system every storage customer operates within.
Storage as a financial instrument
Ultimately, a storage contract is a way of taking a position on time. It lets its holder convert the shape of the forward curve into cash, hedge a physical position, or simply guarantee access to a scarce resource. That is why storage capacity is watched as a market indicator, why terminals near trading hubs command a premium, and why the economics of contango and carry — abstract as they sound — sit at the very centre of the physical oil trade. A tank, properly understood, is a machine for turning time into money.
Positioning for a market opportunity and need capacity secured at the right terms? Talk to our commercial team about term and spot structures.
Request Storage AvailabilityFrequently asked questions
What is contango?+
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How does contango create a storage arbitrage?+
Why do storage rates rise in contango?+
Does storage economics matter if I'm not a trader?+
From theory to a real storage decision
Translating the economics of contango and carry into a real decision means putting numbers to each element. A customer weighing a cash-and-carry position compares the contango available on the forward curve against the fully loaded cost of carry — the storage tariff, the financing rate on the capital committed, and insurance — over the intended holding period. If the contango comfortably exceeds the carry, the trade works; if it is marginal, small movements in rates or financing costs can erase the profit, so a prudent margin is essential.
Just as important is execution risk: securing the storage capacity, the financing, and the forward sale simultaneously, so the spread is genuinely locked rather than merely hoped for. This is where a reliable terminal relationship becomes part of the trade itself — capacity that is available and contractually firm is what turns a theoretical arbitrage into a realised one. The economics may be set by the market, but capturing them depends on the operational certainty that a credible storage partner provides.
Illustrative example
Pricing a cash-and-carry decision
Consider a trader weighing a six-month cash-and-carry. The forward curve offers a contango that, at first glance, looks profitable. Putting numbers to it, the trader tallies the storage tariff, the financing cost on the capital tied up in the oil, and insurance — the full cost of carry — and compares it against the contango over the holding period. The spread is positive but slim, so the trader insists on firm, contractually secured storage and locks the forward sale simultaneously, ensuring the margin is realised rather than merely hoped for. The example shows why the economics set the opportunity but operational certainty — reliable capacity above all — determines whether it is captured.
Illustrative scenario for explanation only; not a representation of a specific transaction or client.
One further nuance is worth appreciating: the economics of storage are dynamic, not static. The contango available today can narrow tomorrow as others act on the same signal, and financing costs move with interest rates. A customer who locks capacity, financing and a forward sale simultaneously converts a moving target into a fixed outcome; a customer who legs into the trade piecemeal risks watching the spread erode before it is captured. This is why sophisticated participants prize execution certainty as highly as the headline spread — and why a dependable, contractually firm storage relationship is not a peripheral detail of the trade but one of its essential components.