Poke Holes in My Hypothetical about Commodity Storage
Just a thought here that I know sounds too good be true but wanted to clear up why.
In theory, during a ZIRP environment, wouldn't it be best to capture low rates, and build out storage infra (gas storage, ags, metal, etc)? So when Fed eventually reverts to high rates, sell the storage for much higher rates.
Would the only problem be waiting during the "eventually" part and ensuring you have enough capital to lick your wounds while storage rates are low (due to low interest rates)?
There are a few premises underlying your proposal which don’t work in the space I’m familiar with.
First, the value of an asset is only influenced to a small extent by current profitability. People understand that things are cyclical. Some asset might enable profits now but people know 6 or 12 months from now is different. And that’s why many assets have business models that are undergirded by long term contracts. Companies will lease a storage tank for years at a time, so they make windfall returns in 3 of those months (in addition to operational advantages). So just because storage is “hot” for a few months, doesn’t mean that the tank is going to be valued as if that is perpetual.
Second, there are no examples I can think of in oil where a pure play storage asset was developed. These are usually built as part of a synergy with pipeline, dock, production, or refinery assets.
Third, high interest rates do not directly cause storage to be profitable. Perhaps theoretically, high interest rates cause a recession which causes demand destruction, which if supply doesn’t adjust causes storage to build and storage assets to be valued. But this is a hypothetical (and one which has not really played out for oil at least since 2022 when the hikes began).
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