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Contango

Contango is a market condition in the futures market where the price of a commodity's futures contract is higher than the expected spot price of the commodity at the contract's maturity. This situation occurs when the cost of carrying the commodity (such as storage, insurance, and interest) outweighs the current supply-demand conditions. In a contango market, futures prices typically decline as the delivery date approaches, converging with the spot price.

Example

In a contango market, the price of a futures contract for oil with a delivery date six months in the future may be higher than the current spot price of oil, reflecting the costs of storage and transportation.

Key points

• Contango is when the price of a futures contract is higher than the expected spot price at contract maturity.

• It reflects the costs of carrying the commodity, such as storage and insurance.

• Futures prices in contango typically decline as the contract approaches maturity, converging with the spot price.

Quick Answers to Curious Questions

Contango occurs when the cost of carrying a commodity (storage, insurance, interest) exceeds current supply-demand conditions, leading to higher futures prices.

In a contango market, futures prices decline as the contract approaches maturity, converging with the spot price of the commodity.

The opposite of contango is backwardation, where the futures price is lower than the expected spot price at contract maturity.