The theory of storage in the crude oil futures market, the role of financial conditions

• Published in: The journal of futures markets Vol. 40; no. 7; pp. 1160 - 1175
• Main Authors: Ahmadi, Maryam, Bashiri Behmiri, Niaz, Manera, Matteo
• Format: Journal Article
• Language: English
• Published: Hoboken Wiley Periodicals Inc 01-07-2020
• Subjects: Basis; Crude oil; crude oil futures; financial stress; Futures market; Inventory; Petroleum; Scarcity; theory of storage; threshold SVAR
• ISSN: 0270-7314; 1096-9934
• DOI: 10.1002/fut.22113

This study examines the impacts of inventory and financial instability on the basis of the crude oil market. The results show that, first, the basis rises with inventory, and this effect is higher during low inventory regimes. This validates the theory of storage in the crude oil market. Second, the basis rises with financial instability, and this effect is higher during turbulent regimes. These results warn the oil market participants that, to make decisions based on the basis variation, traditionally known as a signal of scarcity or abundance, the underlying cause of the variation has to be considered.