Group for Research in Decision Analysis

Optimizing the "Tanker Trade" using spot and forward markets

Matt Davison University of Western Ontario, Canada

The oil market is somewhat unusual among commodity markets in that the forward curve, while normally downward sloping in maturity, still frequently goes into a "contango" state in which the forward curve slopes upward. During periods of extreme contango it may be profitable to buy oil at the spot rate, sell it forward, and pay to store it in an oil tanker, used simply as floating storage.

This talk begins where that story ends. Consider a speculator with a tanker full of oil and a contract to deliver that oil at time T in the future. Depending on how the forward curve fluctuates, the speculator may be able to extract even more value from the trade by advancing it to an earlier delivery, and then perhaps by delaying it to a later delivery.

In reality the price of renting tankers also fluctuates over time, and the optimal trade involves renting a tanker and then, perhaps some time later, filling it with oil, and then playing with delivery dates.

In my talk I will discuss ways to think about this trade and to model the tanker storage problem. We will set up the corresponding Markov decision problem and prove some results about the structure of the optimal control which greatly simplify later numerical work. We then compare two different numerical solutions, one based on Least Squares Monte Carlo idea, to the Forward Direct Optimization heuristic preferred by some traders and to other related trades. At every stage we will attempt to visualize the results in the complicated multidimensional solution space.

Joint work with Behzad Ghafouri (Western) and Somayeh Moazeni (Stevens Institute of Technology)

Bio: Matt Davison is the appointed Dean of Western University’s Faculty of Science, and currently Director of its School of Mathematical & Statistical Sciences. Davison held a Tier 2 Canada Research Chair in Quantitative Finance between 2006 and 2016 and is a Fields Institute Fellow. Prior to joining Western as a faculty member, Davison was Assistant Vice President, Equity Arbitrage, at Deutsche Bank Canada from 1997-1999. His research focuses on Energy finance, Options pricing, Portfolio optimization and Real options.


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