Question

Describe in your own words what is the relation between the Forward price of oil and the cost of storage. Besides providing the basic relation (increasing, decreasing, independent), please provide the economic reasoning. You are greatly encouraged to provide any graphical representation that might help convey the idea. Maximum 200 words. Please write as clear as possible.

Answer 1

the forward price of a commodity is decided on the assumption of zero arbitrage principle , the principle stand true for oil pricing as well. The forward price of a commodity is work on the concept of cost and carry model .

Cost of carry alludes to expenses related with the conveying estimation of a speculation. These expenses can incorporate money related costs, for example, the premium expenses on securities, premium costs on edge accounts, enthusiasm on advances used to make a venture, and any capacity costs associated with holding a physical resource.

Cost of carry may likewise incorporate open door expenses related with taking one situation over another. In the subordinates markets, cost of carry is a significant factor for thought when producing qualities related with a benefit's future cost.

Forward price = current price +carry cost.

it means , higher the carry cost higher would be forward price of oil.