Finally, both product and crude futures markets are in extremely strong backwardation. This simply means the future price is considerable below the prompt or present price. Those wishing to ensure future supplies can do so much more cheaply by locking in futures contracts than by physically storing the oil. The steeper the backwardation, the greater the incentive not to hold stocks. This then creates a self-feeding circle.
Low stocks generate a belief of shortage which in turn drives prompt prices higher.
As this steepens the backwardation, there is more incentive to lower stock holding giving the impression of even greater shortage forcing prompt prices higher. In a contango market where future prices are higher than prompt the steepness of the forward price curve is constrained by the cost of storage. If the future price rises above the cost of storage then it is cheaper to store than to buy paper barrels. In backwardation however, there is no such constraint. It represents a classic case of market failure arising from poor information.