The theory for the shape of the commodity forward curve “Storage Models” says that generally upward sloping forward curves happen when inventory levels are above demand, but later on when schweser explains Working curve it says that is typically un Upward, concave curve because of LOW inventory levels.
Doesn’t this sound like a contradiction? Is upward curves because of low or high inventory levels?
The reading says " The Working curve is typically upward sloping and concave, where low inventory may be due to delays and costs, causing convenience yields to be high."
I don’t think the sentence is written in the clearest of ways.
It does not say the Working curve is concave because of low inventories. If inventories are low, the costs of carry will typically be high, largely due in part to high convenience yields and the corresponding curve would be downward sloping.
That’s how I understand it
The typical curve is upward sloping and concave, yeah. This is not always the case – it depends on whether the commodity can be stored, or stored easily. An upward + concave curve just reflects a primarily contango term structure where you assume that inventory levels are healthy and the costs of carrying thus outweigh the convenience yields => they will not if the commodity is difficult to store. The concave portion of the curve can be interpreted as having backwardated influence. The rationale is that when prices get high enough, scarcity themes come into play, and production/supply of these commodities increase, thus dampening the contango term structure.