NISM Certifications · NISM-Series-XV: Research Analyst · Fundamental Analysis of Commodities
A rising stocks-to-use ratio for a commodity, other factors unchanged, is generally interpreted by analysts as:
A rising stocks-to-use ratio is bearish for prices because inventories are growing relative to consumption, indicating comfortable supply. Scarcity eases, so prices tend to soften. Low stocks relative to use are the condition that is bullish and often linked to backwardation.
- AA bearish signal for prices as supply is ample relative to demandCorrect
- BA bullish signal for prices as supply is tightening
- CNeutral, as stock levels have no bearing on prices
- DA sign that the commodity will move into backwardation
Explanation
A higher stocks-to-use ratio means more inventory is available relative to consumption, easing scarcity and putting downward pressure on prices. Tight stocks, not ample ones, tend to cause backwardation.
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