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Storage cost

What it costs to hold a physical commodity for a period, and one of the main inputs to the shape of a futures curve.

Storage is a real, finite resource: tanks, silos, vaults, warehouses. Its cost is normally small and stable, so curves sit in mild contango. When storage fills, the marginal rate explodes, and when there is nowhere left to put the commodity the curve can do extraordinary things.

Goods that cannot be stored at all — electricity, some perishables — have curves driven purely by expectations, which is why power prices can spike a hundredfold and mean-revert in a day.

Example: crude tank rent of about $0.40 a barrel per month plus 5% financing on $80 is roughly $0.73 a month. A curve wider than that pays a storage trade; see full-carry.

Related: cost-of-carry, contango

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Contango and backwardationTwo futures curves against contract expiry: one rising above spot, one falling below it.The same commodity, priced for delivery at different dates.78.0076.0074.0072.0070.00Futures pricespot+1m+2m+3m+4m+5m+6mMonths until the contract expiresspot price74.00CONTANGOlater contracts cost more than spotBACKWARDATIONlater contracts cost less than spot
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.

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