Theory of storage
Encyclopedia
The Theory of Storage describes features observed in commodity markets:
When inventory levels of the commodity in question are high:
When inventory levels of the commodity are low:
The theory of storage was originally developed and described by Holbrook Working
in 1933.
When inventory levels of the commodity in question are high:
- Futures prices tend to be in contangoContangoContango is the market condition wherein the price of a forward or futures contract is trading above the expected spot price at contract maturity. The resulting futures or forward curve would typically be upward sloping , since contracts for further dates would typically trade at even higher prices...
- The volatility of spot and futures prices tend to be low, and equal
When inventory levels of the commodity are low:
- Futures prices tend to be in backwardationBackwardationNormal backwardation, also sometimes called backwardation, is the market condition wherein the price of a forward or futures contract is trading below the expected spot price at contract maturity. The resulting futures or forward curve would typically be downward sloping , since contracts for...
- The volatility of nearby futures prices are raised compared with the volatility of long term futures prices
The theory of storage was originally developed and described by Holbrook Working
Holbrook Working
Holbrook Working , a professor of economics and statistics at Stanford University’s FoodResearch Institute, is known for his contributions on hedging, the theory of futures prices – which anticipated the efficient market hypothesis, an early theory of market maker behavior, and the theory of...
in 1933.