Theory of storage

The Theory of Storage describes features observed in commodity markets:
When available supplies of the commodity in question are high, and the working inventories of commercial consumers of that commodity are accordingly held to a minimum,

Futures prices tend to be in contango
The volatility of spot and futures prices tend to be low, and futures premiums rise to the full cost of storage

When supplies are tight, and purchasing managers build production inventory levels to ensure availability,

Futures prices tend toward backwardation
The volatility of cash and the nearby futures prices rises with respect to that of the more distant futures contracts

The theory of storage was originally developed and described by Holbrook Working in 1933. It was extended by Nicholas Kaldor in 1939, by Brennan in 1958, by Weymar in 1968 and by Schwartz in 1997.