Thursday, November 12, 2015

Contango

Contango is the process whereby near-month futures are cheaper than those expiring further into the future, creating an upward sloping curve for futures prices over time. The reason behind this is most often attributed to storage costs; storing barrels of oil or bushels of corn isn’t cheap, and the costs have to be passed down the line. Some commodities, such as natural gas and crude oil, are known for exhibiting steep contango over time, while others may show very little evidence of it at all.

The opposite of Contango is backwardation where nearby prices are higher than futures prices.