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In regards to commodities what is the definition of an inverse market?


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2012-08-16 16:21:44
2012-08-16 16:21:44

An inverted market is when the successive future months' prices are lower than the cash or spot price. It is the opposite of a carry market where future months are higher relative to the spot price, quite often at or near carry, which pays for the storage and financing of the commodity - hence carry.

In an inverted market, the user of the commodity is prepared to pay a much higher relative price to the future to have access to the physical as it often happens in the oil markets.

Owing to the long haulage of oil and special storage requirements, the physical buyer, e.g. a refinery, is prepared to pay a premium or a convenience yield to hold inventory even though he has to finance it.

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