Contango & Backwardation
The shape of prices across future months signals whether the market expects surplus or scarcity.
Two ugly words — contango and backwardation — that pro traders throw around to sound smart. By the end of this 4-minute module, you'll use them better than they do.
💡 Think of it like: Concert tickets: if next month's show costs MORE than this week's (storage of hype), that's contango. If a sold-out show TODAY costs more than future dates (scarcity now), that's backwardation.
Why does next month cost a different price?
The same barrel of oil has different prices depending on when you want it delivered. Line those prices up across months and you get the futures curve — and its shape tells a story.
Contango: the future costs more 📈
When later months are more expensive than the near month, that’s contango.
Think concert tickets where future dates cost more — the price bakes in the cost of carrying the commodity (storage, insurance, financing). Contango usually whispers: “plenty of supply right now, no rush.”
Backwardation: the future costs less 📉
When the near month is more expensive than later months, that’s backwardation.
Like a sold-out show tonight — everyone wants it now, so immediate delivery commands a premium. Backwardation usually signals: “scarcity, tight supply, people need it today.”
The hidden cost: rolling
Since contracts expire, holding a position long-term means rolling — closing the expiring month and opening the next. In contango, the next month is pricier, so each roll quietly costs you. This is why “just buy and hold oil futures” isn’t free the way buying a stock is.
Pro fact: This is exactly why some oil ETFs lose money over years even when oil’s spot price is flat — contango bleeds them on every roll.
Crude oil for delivery 6 months from now trades HIGHER than oil for delivery this month. What's this called, and what does it usually signal?
🛡️ Risk-Management Focus
These curve shapes affect anyone holding positions across expirations — 'rolling' a contract in contango quietly costs money each time. Know the curve before assuming a long-term hold is free.