Speculative Floating Oil

We introduce commodity cash-and-carry traders into a limits to arbitrage extension to the speculative storage framework. Carry traders are assumed to have access to a market for off-shore storage technology — shipping vessels that can be chartered to store physical commodity bought in one period for delivery in the next period. We show that in equilibrium arbitrage activities of cash-and-carry traders are linked with the risk premium in commodity prices and the cost of floating storage. We test empirical predictions of the model using a novel data set with granular information on every tanker that delivered seaborne crude oil into the United States during 2008-2012. Our empirical results are consistent with the predictions of the model and are very strongly present in the data.