J Futures Markets. 2020;1–16. wileyonlinelibrary.com/journal/fut © 2020 Wiley Periodicals, Inc. | 1 Received: 4 September 2019 | Accepted: 23 February 2020 DOI: 10.1002/fut.22113 RESEARCH ARTICLE The theory of storage in the crude oil futures market, the role of financial conditions Maryam Ahmadi 1 | Niaz Bashiri Behmiri 2 | Matteo Manera 3 1 Department of Economics, Management and Statistics (DEMS), University of Milan‐Bicocca, Milan, Italy 2 Department of Economics and Finance, University of Stavanger, UiS Business School, Stavanger, Norway 3 Department of Economics, Management and Statistics (DEMS), University of Milan‐Bicocca and Fondazione Eni Enrico Mattei (FEEM), Milan, Italy Correspondence Maryam Ahmadi, Department of Economics, Management and Statistics (DEMS), University of Milan‐Bicocca, Piazza dell'Ateneo Nuovo, 1, 20126 Milano, Italy. Email: mar.ahmadi@gmail.com Abstract This study examines the impacts of inventory and financial instability on the basis of the crude oil market. The results show that, first, the basis rises with inventory, and this effect is higher during low inventory regimes. This vali- dates the theory of storage in the crude oil market. Second, the basis rises with financial instability, and this effect is higher during turbulent regimes. These results warn the oil market participants that, to make decisions based on the basis variation, traditionally known as a signal of scarcity or abundance, the underlying cause of the variation has to be considered. KEYWORDS crude oil futures, financial stress, inventory, theory of storage, threshold SVAR JEL CLASSIFICATION G13; G15; G31; Q41 1 | INTRODUCTION The markets for energy products are characterized by high levels of fluctuations in prices and inventories. These fluctuations are in part unpredictable, and this leads market participants to use futures contracts and inventories as vehicles for reducing risk. Thus, the spread between futures and spot prices, the basis, is an important signal of the marginal value of storage for commodity participants (Knittel & Pindyck, 2016). The relationship between price variation and the holding inventory of commodities is described by the theory of storage. While this theory is widely accepted by energy market participants, the literature on the analysis of the theory of storage in the market for crude oil is inconclusive. 1 This is an important issue, since the variation of the basis is an important factor in setting the efficient hedging strategy, improving profitability, and deciding the time when to sell or buy in oil futures markets. It is also a signal for refiners to decide the timing of crude oil purchases and the production and delivery of their products (Cho & McDougall, 1990; Serletis & Hulleman, 1994). This paper examines the theory of storage and its implications in the crude oil market, by considering, for the first time, the role of financial market conditions. The theory of storage makes two main predictions related to the quantity of a commodity held in inventory. First, in times of scarcity, the spot price rises more than the futures price, mainly because market participants believe that a higher price in the long term will stimulate the supply of the commodity, a situation which is called “backwardation.” Conversely, in times of abundance, the spot and futures prices tend to decrease in equal measure, a situation which is 1 See, for example, Serletis and Hulleman (1994); Cho and McDougall (1990); Geman and Ohana (2009); Symeonidis, Prokopczuk, Brooks, and Lazar (2012); and Nikitopoulos, Squires, Thorp, and Yeung (2017). We return to this, in more detail, in the next section.