Definition of contango

When the price of a spot or near-term contract is lower than the price for forward deliveries. This is quite normal, as you would expect the futures price to be higher because of carrying costs, including interest rates, storage fees and insurance charges. The reverse situation, when spot prices are higher than futures prices, is called backwardation.

 

contango in the news

In October 2011 an FT columnist examined new rules in the US to limit positions in commodities futures. He said banks and many academics argue futures prices do not affect spot prices, which they say are determined by supply and demand plus changes in inventories. However, the writer pointed out that buying of futures pushes up futures prices, thereby increasing contango.

 In May 2013 an FT report investigated increased pressure on trading margins for commodities traders. Instead of being in contango, spot oil prices were higher than forward contracts, a situation known as backwardation. The article noted that contango is much more favourable because it allows traders to buy crude oil cheap and store it while locking in future prices.

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