Commodity Futures Pricing When Future Supply Can Avoid Storage Costs

Summary

The document questions the cost-of-carry model for commodity futures when storing a commodity today may cost more than obtaining new supply at a later date. It uses oil as an example and asks whether the usual carry-based price should be treated as an upper bound, with the future spot price limiting the contract price.

It does not provide an answer or supporting market evidence; it is a request for a more general pricing framework. The proposed minimum of the carry price and expected future spot price is presented as a tentative idea, not an established rule. The question raises a useful distinction between carrying existing inventory and relying on future production, but the document does not address how inventory availability, convenience yield, uncertainty, or risk premia affect actual futures prices.

Key ideas

• The document asks how commodity futures should be priced when storage costs exceed the cost of obtaining later supply.
• It contrasts a standard cost-of-carry calculation with the possibility of buying newly produced oil in the future.
• It proposes, but does not validate, treating the carry-based price as a ceiling tied to expected future spot.
• The document poses an open question and supplies no derivation, data, or definitive pricing method.

Tags

# Future price incorporates cost of carry (like storage cost), but what if its cheaper to just not store it?


# Future price incorporates cost of carry (like storage cost), but what if its cheaper to just not store it?












Many futures models say the future price is based on the current price plus the cost of carry. IE, assuming zero-interest-rates, then something like:

`Future_price_at_maturity = current_price × (1 + cost_of_carry)^(time_to_maturity)`

But what about futures on commodities where its cheaper to get new supply in the future rather than pay the carry cost today? IE, I could buy oil today and pay to store it in a tanker for 5 years and then the above equation would apply; but it would be stupid to pay that storage cost for 5 years because we could instead just wait 5 years and then buy new oil fresh-out-of-the-ground and avoid all that storage cost. In that case, the correct futures price must be less than the equation above suggests.

Isn't the above equation a ceiling on the price rather than an equality? What's the best way to generalize that equation? I'm assuming the price should be like `"= min(cur_price*carry, expected_future_spot_price)"` but that seems to get recursive very quickly. What's the correct way to adjust that equation?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.