Definition
Contango / Backwardation
Contango is when futures prices are higher than spot (upward-sloping curve), and backwardation when they are lower (downward-sloping), reflecting storage costs versus supply tightness.
In contango, distant-month futures cost more than spot, typical when storage and financing dominate (common in well-supplied markets). In backwardation, near-term prices exceed later ones, signalling tight supply or strong immediate demand.
For MCX traders rolling positions, the curve shape matters: rolling in contango erodes returns (you sell low, buy high), while backwardation rewards rollovers. Crude oil flipped into deep contango during the 2020 demand collapse, briefly sending WTI prices negative abroad.
Related terms
- Spot vs Futures (Commodity)The spot price is for immediate delivery of a commodity, while the futures price is agreed today for delivery later; the gap reflects storage, financing and convenience costs.
- Convenience YieldConvenience yield is the implicit benefit of physically holding a commodity rather than a futures contract, such as ensuring supply or meeting unexpected demand.
- Roll YieldRoll yield is the gain or loss a futures investor earns from rolling an expiring contract into a later one, positive in backwardation and negative in contango.
- Cost of CarryCost of carry is the net cost of holding an asset to a future date, comprising financing cost less any income, and it determines the fair-value difference between a futures price and the underlying spot price.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.