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this paper has enlightened me.
commodity futures returns historically linked to "backwardation" or "roll yield" seem to be simply proxies for inventory indicators from the theory of storage.
namely, the basis (difference between spot price and next nearby futures price), when large and positive is indicative of a steeply backwarded futures curve. when it is negative, the curve is in contango.
low inventory levels amt to low supply and thus high demand now. lower inventory levels also mean higher volatility (concave increasing function according to the paper).
this is just some fo the great insights from this paper:
Fundamentals of commodity futures returns
enjoy!
Barron
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Since the higher returns are asscociated with higher volitility is it safe to assume that low inventory commdoities do not outperform on a risk adjusted basis? Or did the author not address this? Also, a sharp differance between spot and futures is often the result of a high cost of carry and not neccesarily low inventories. At any rate the best advice I ever received about trading commodity futures was to "lie down until the desire to trade went away."