Oil-storage trade
Encyclopedia
The oil-storage trade is a trading strategy where oil tank owners and companies that lease storage buy oil
Oil
An oil is any substance that is liquid at ambient temperatures and does not mix with water but may mix with other oils and organic solvents. This general definition includes vegetable oils, volatile essential oils, petrochemical oils, and synthetic oils....

 for immediate delivery and hold it in their storage tanks, then sell contracts for future delivery
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...

 at a higher price. When delivery dates approach, they close out existing contracts and sell new ones for future delivery of the same oil. The oil never moves out of storage. Trading in this fashion is only successful if the forward market is in "contango", that is if the price of oil in the future also known as forward prices
Forward price
The forward price is the agreed upon price of an asset in a forward contract. Using the rational pricing assumption, for a forward contract on an underlying asset that is tradeable, we can express the forward price in terms of the spot price and any dividends etc...

 are higher than current prices or spot price
Spot price
The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate settlement . Spot settlement is normally one or two business days from trade date...

s. Storing oil became big business in 2008 and 2009, with many participants - including Wall Street giants such as Morgan Stanley
Morgan Stanley
Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....

, Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...

 or Citicorp - turning sizeable profits simply by sitting on tanks of oil.

It has been estimated that one in twelve of the largest oil tankers are being used for the storage, rather than transportation of oil, and that if lined up end to end, the tankers would stretch out for 26 miles.
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