Cost Of Carry of Oil

[cakulev]

Does anybody know how much physical cost of carry should be for oil? For the most of this year, oil futures were in heavy contango. I mean, surely the cost of carry is not over a dollar? That would mean 20% annual cost!:eek:

 

[tomcole]

You also need the ability to store it, deliver it etc

 

[cakulev]

Yes, but in the carry cost should be only the storage expense. If you roll over your contract for the next month, it just means you are postponing your actual buying for additional month. Surelly this can't be 1.7% (1 $ against current price of 60$)

 

[tomcole]

What months do you mean?

If you want to arb it, find another market where the opposite is true and basically you borrow money from one market and lend it to the other, putting the spread in your pocket.

 

[Spddst]

cakulev,
There are a couple of costs one would/will incur when storing physical crude.

1) Purchasing the crude,
2) Transportation through the pipeline(s) to your storage facilities,
3) Local, state and federal tariffs,
4) Storage leasing (you can use the lease as a tax deduction and reduce capital gains),
5) Insurance and,
6) Hedging.

There are other elements to storage, but those are the important ones to consider. There is also the element of transporting crude by sea, involving numerous steps. If you are really considering taking physical delivery and storing it, consult an energy attorney with in-depth knowledge of the markets, otherwise you’ll be lost.