Contango

Contango is a market state in which futures prices for later delivery are higher than the spot price or the price of nearer delivery.

Contango is the normal shape for a commodity that is cheap and easy to store. If wheat for delivery next year costs more than wheat today, the gap roughly covers storage, insurance, and the interest cost of holding grain. Traders call this the cost of carry. When the gap grows wider than the cost of carry, it becomes profitable to buy spot, store, and sell forward, which pulls the curve back toward carry.

Contango usually signals that the market has more supply than it needs right away. Inventories are building, and buyers are in no hurry. Deep contango appears after demand collapses: in the spring of 2020, crude oil for immediate delivery traded far below later months because storage tanks were nearly full and nobody wanted barrels right away.

For investors who hold futures, contango creates a negative roll yield: each time they replace an expiring contract with a dearer later one, they lose a little. The full mechanism is in contango and backwardation.