Overview
The commercial desk should distinguish a market curve from a firm physical sale. The relevant product, location, quantity, timing and payment terms may differ, so a visible price spread cannot simply be treated as the cargo's available profit.
Key takeaways
- Identify the exact price dates and commercial basis being compared.
- Separate a market reference from an executable physical sale.
- Include vessel, fuel, entry, exit and other material carrying costs.
- Calculate the sales improvement required to cover the defined cost boundary.
- Do not treat an illustrative threshold as a forecast or investment recommendation.
Understand the price signal
EIA describes higher prices for more distant delivery dates as contango. EIA explanation of futures curves
That definition describes the relationship between prices at different maturities. It does not establish that a specific physical parcel can be bought, stored and sold on matching terms, or that all costs and conditions are covered by the observed difference.
For the actual enquiry, identify the reference's product and delivery basis. A benchmark price may not match the cargo's commercial specification or intended receiver. Do not assume that the same differential applies without appropriate supporting terms.
The date of the observation matters too. A historical curve can explain an earlier market situation but should not be described as the current opportunity. Obtain appropriately current information for an actual commercial decision and preserve its scope.
Separate the market reference from the physical proposition
The cargo-side comparison needs an achievable purchase and sales arrangement, plus a feasible storage and exit proposition. A reference price can guide the questions, but it is not a counterparty commitment to take the actual cargo.
If the later buyer is not firm, label its value as a scenario. The desk can calculate the improvement required to justify holding without claiming that the market will deliver it.
Do not mix a purchase price for one quantity or location with a sales reference for another unless the differences are explicitly reconciled. Quantity conversion, product differential and delivery expenses can materially change the result.
Any separate financial transaction would need its own assessment and terms. This physical-cargo comparison does not establish that a derivative position removes the parcel's price, basis, funding or delivery exposure.
Define the complete carrying-cost boundary
Include the vessel or storage amount for the applicable period, the fuel component actually borne by the decision-maker and the entry and exit services needed for the selected proposition. Avoid adding a fuel model where the quoted storage amount already includes that scope.
Other material costs may belong in the actual decision, such as a defined funding expense or an agreed commercial adjustment. State their basis and whether they are fixed, estimated or unresolved. A selected-cost contribution should not be labelled complete profit when relevant components are omitted.
The holding period should run through the applicable exit event rather than stopping when a buyer is expected to agree. Notice, receiving availability and the assessed final sequence can extend the commercial exposure.
Where later periods have different rates, apply those steps. A flat daily estimate can understate the cost if the expected sale is delayed beyond the original period.
Calculate the required sales improvement
The following example is fictional and uses an expressly common commercial barrel basis. It is not a current market spread, forecast or recommendation to enter a storage or financial transaction.
ILLUSTRATIVE: Assume a physical parcel of 500,000 commercial barrels. The proposed later sale improves the net sales value by $3 per barrel relative to an achievable immediate sale, creating $1,500,000 of additional value before holding costs.
The defined incremental costs are $750,000 for the vessel period, $150,000 for separately included fuel, $250,000 for entry and exit services and $200,000 for other specified carrying costs. These sum to $1,350,000. The simplified incremental contribution is therefore $150,000.
The required improvement to cover those included costs is $2.70 per barrel: $1,350,000 divided by 500,000. If the achievable improvement is only $2.50 per barrel, additional value is $1,250,000 and the simplified contribution is negative $100,000.
| Fictional sales improvement | Additional value | Included carrying costs | Incremental contribution |
|---|---|---|---|
| $3.00 per barrel | $1,500,000 | $1,350,000 | $150,000 |
| $2.70 per barrel | $1,350,000 | $1,350,000 | $0 |
| $2.50 per barrel | $1,250,000 | $1,350,000 | Negative $100,000 |
The threshold belongs to the stated parcel, duration and cost boundary. It changes if the exit moves, an expense is omitted or the actual sales proposition differs from the assumed net improvement.
The calculation should therefore support a focused question: what later physical value is genuinely available, and does it exceed the complete cost on compatible terms? It should not turn a market headline into a completed trade result.
Test the unresolved variable that can reverse the case
A narrow positive contribution can disappear through a modest change in duration, receiving expense or actual buyer value. Identify the unresolved component most capable of changing the decision rather than refining every small estimate equally.
If the later buyer is unconfirmed, its achievable terms may be the priority. If the sale is firm but the exit period is uncertain, the extension cost and receiving opportunity may dominate the analysis.
Use defined scenarios and preserve the source of each input. Do not invent probabilities to produce an expected return when the available evidence does not support them.
The immediate-sale alternative also needs to be real. A comparison against an unavailable prompt price can distort the incremental benefit just as much as an unsupported later sale.
A storage-signal applicability test
| Question | Evidence needed | Misinterpretation prevented |
|---|---|---|
| What prices are compared? | Product, location, date and unit | Treating unlike references as a cargo spread |
| Is the later value executable? | Actual buyer terms and conditions | Reporting a market reference as a firm sale |
| Is the holding period complete? | Start, exit event and extension assumptions | Omitting the cost after the sales decision |
| Are all material costs included? | Scoped quotations and stated allowances | Calling a partial contribution profit |
| Is the physical proposition feasible? | Relevant qualified assessments | Letting arithmetic substitute for suitability |
| What can change the result? | Defined sensitivity and decision deadline | Hiding a conditional case behind one positive total |
The test connects market interpretation with a concrete commercial enquiry. It does not determine whether a financial position or storage strategy is suitable for a particular investor.
Fictional case: the visible curve does not match the cargo
A fictional trader observes a higher later-dated reference and compares it with an immediate sale opportunity for a physical parcel. The first model treats the full reference spread as the parcel's additional value.
A buyer enquiry reveals a different product and delivery basis, while the storage quote excludes the final exit service. The complete physical comparison therefore has a smaller value improvement and a larger cost boundary than the initial worksheet.
The desk recalculates the required premium and obtains a realistic later-sale proposition. It may continue investigating the strategy, but it no longer describes the observed curve as proof of a completed positive return.
Common mistakes
A market curve is not a firm physical buyer. Omitting entry or exit expenses overstates the holding margin. Another error is stopping duration at the expected sale date or using an unavailable immediate-sale baseline. Finally, do not describe a partial cost threshold as complete profit or assume a separate financial position removes every physical-cargo exposure.
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Educational information only; not legal, financial or trading advice. Contract wording and applicable rules control. Verify current requirements and obtain qualified advice before acting.
Frequently asked questions
Does contango prove floating storage is profitable?
No. Test the actual physical sales improvement against the complete carrying proposition and its conditions.
Can the desk investigate before a later buyer is firm?
Yes, but label the value as a scenario and calculate the threshold needed. Do not present it as committed revenue.
Why compare with an immediate sale?
It can provide an achievable alternative for the forward decision. Its terms must be real and compatible with the parcel being assessed.
Does the illustrative threshold recommend a trade?
No. It demonstrates arithmetic within stated assumptions. Actual decisions require current commercial terms, complete costs and appropriate assessment.