The Storage and Term Structure of Commodity Futures Prices

This chapter helps readers to understand what determines the term structure of the price of futures contracts. "Term structure" refers to the relationship between the prices of contracts with different deadlines. The chapter provides information to help answer the questions: are futures markets a good tool for forecasting future physical prices?; and what is the link between physical quantities, storage and the prices of futures contracts? The negative spread between the futures contract and the anticipated spot price, for the same maturity date, is called normal backwardation. The motivations for committing to a futures contract can be studied in a relatively standardized modeling. The theory of storage introduces concepts that are different from those of the normal backwardation theory in order to study the term structure of prices. Hedging makes it possible for an agent to transfer a risk to another agent through futures contracts.