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Components of Theoretical Oil Futures Carry

Article Quant Q&A · Author: Aksel
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Summary

The document outlines the cost components used to relate an oil spot price to a theoretical futures price. It includes funding, storage, and the cost of removing oil from storage and transporting it to the delivery point. Funding is represented by the weighted average cost of capital of an average market participant, rather than the financing rate specific to an individual trader.

The framework also subtracts economic benefits associated with holding the physical commodity, which can offset carrying costs. The answer is a qualitative cost-of-carry description, not a numerical calculation: it does not specify how to estimate each component, define the relevant market participant, or quantify the benefits of physical ownership. Actual inputs may depend on the commodity, storage arrangements, delivery location, and market conditions. The document’s stated terminal-storage estimate comes from the question, but the answer does not validate or incorporate it into a worked example.

Key ideas

  • A theoretical oil futures price incorporates spot value and the cost of financing the position.
  • Storage and moving oil from storage to the delivery point contribute to carrying costs.
  • The funding input is framed as the average market participant’s cost of capital.
  • Economic benefits from holding the physical commodity reduce the futures carry calculation.
  • The document gives no worked example or method for estimating the individual components.

Tags

CommoditiesFuturesCarry
Full text
# When calculating theoretical futuresprices for oil, how do you calculate the storage costs?


# When calculating theoretical futuresprices for oil, how do you calculate the storage costs?












I have read that the terminal cost can typically be 0,15-0,5 dollars per barrel, but are you also supposed to include the cost of capital (WACC) when calculating the total cost? Why? Why not?

## Answer by ZRH (score 2)

https://quant.stackexchange.com/a/43757

The theoretical futures cost would be spot price plus funding cost, i.e. WACC (that of the average market participant, not yours), plus the cost of storage, plus the cost of taking the oil out of storage and bringing it to the point of delivery, minus any economic benefits that accrue from holding a long position of the commodity

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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