When the curve pays enough to keep barrels at sea.
WHY IT MATTERS
A tanker can become a storage tank when the forward price pays enough to cover the ship, fuel and financing.
Floating storage is crude held on a tanker that is not moving toward a destination. It is the most expensive rung on the storage ladder and therefore the last one bid for, which is precisely what makes it informative: a large floating storage build tells you that cheaper onshore options have been exhausted.
The economics are the same arbitrage as any other storage trade, with the ship's day rate in place of tank rental. Buy the prompt month, sell a deferred month, charter a vessel, and hold. The trade works when the contango exceeds the total cost of the charter, financing and insurance over the period.
the vessel's charter cost per day, which itself rises as demand for storage rises
cargo size
roughly 2 million barrels for a VLCC
days
the holding period between the two contract months
The self-limiting part is the day rate: chartering ships for storage removes them from the freight market, which raises the rate and closes the trade.
That feedback is the mechanism worth understanding. Floating storage competes for vessels with actual cargo movement. As storage demand takes tonnage out of the trading fleet, freight rates rise, which raises the cost of the storage trade and simultaneously raises the cost of moving every real cargo. So a deep contango does not only reflect a full onshore market; it actively tightens freight.