Commodity Inventory Risk Premia

Low inventory levels tend to increase the volatility of spot prices. Long investors in commodity futures with low inventories should therefore expect to earn more to get compensated for the increased price volatility. Academic research suggests that the inventory status may be reflected in commodity futures basis and price momentum. The theory of storage, as described above, is the underlying economic rationale for the strategy, which takes diversified long and short positions in commodity futures based on inventory levels reflected in futures prices.

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