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	== See also ==		== See also ==
	* [[Forward Premium]]		* Forward Premium
	* [[Commodity Money]]		* Commodity Money
	* [[Market Failure Theory]]		* Market Failure Theory

	== References ==		== References ==

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'''Contango''' is a market condition in which the forward price of a commodity or financial asset is higher than its spot price. The term is most commonly used in the commodity futures markets, where contango refers to an upward-sloping forward curve. It is the opposite of backwardation, in which forward prices are below the spot price.

== Definition and Measurement ==
Contango is identified by comparing the prices of contracts with different delivery dates. If the contract with a later delivery date trades at a higher price than the contract with an earlier delivery date, the market is said to be in contango. The extent of contango is measured by the spread between forward and spot prices, sometimes expressed as an annualised rate.

The shape of the forward curve reflects the balance of supply and demand for the asset, the cost of storage, and the expectations of market participants. A curve may be in contango at some maturities and in backwardation at others, producing a humped or kinked shape.

== Causes ==
One cause of contango is the cost of carry, which includes storage, insurance, and financing costs. If the cost of holding the asset is positive, the forward price must exceed the spot price by the cost of carry for arbitrage to be unprofitable. Contango therefore reflects the compensation required by holders of the asset.

A second cause is convenience yield, the benefit that accrues from holding the physical asset rather than a forward claim. When the convenience yield is high, it can outweigh the cost of carry and produce backwardation. When it is low, the market tends to be in contango.

Expectations about future supply and demand also influence the curve. Expectations of higher future prices, or of tighter future supply, tend to steepen contango.

== Consequences ==
Contango affects the returns earned by investors who hold futures positions through time. An investor who holds a long futures position in a contango market and rolls it forward sells the expiring contract at a lower price and buys the next contract at a higher price, incurring a roll cost. This roll cost reduces the return relative to the change in the spot price.

Contango affects the economics of storage and of inventories. When the market is in contango, it is profitable to buy the asset, store it, and sell it forward, provided the contango exceeds the cost of carry. This arbitrage activity links prices across maturities and provides a return to storage operators.

Contango also affects producers and consumers who use futures to hedge. Producers who sell forward receive the forward price, which is higher under contango, while consumers who buy forward pay more. The curve therefore shapes the incentives for hedging and for inventory management.

== Policy and Analysis ==
Contango is monitored by exchanges and by regulators because extreme conditions can signal stress in the market or in the physical supply chain. In energy markets, contango has been associated with large inventories and with slack demand, while backwardation has been associated with tight supply.

Analysts use the shape of the forward curve to infer market expectations and to gauge the balance between supply and demand. The curve is also used in the pricing of derivatives and in the valuation of storage and of physical assets.

== Contango in Energy Markets ==
Contango is especially prominent in energy markets, where the physical characteristics of the commodity and the structure of the market shape the forward curve. Crude oil, natural gas, and refined products are stored and transported in ways that generate substantial costs, and these costs are reflected in the price relationships across maturities.

In the crude oil market, the forward curve may switch between contango and backwardation depending on the level of inventories and on the balance between supply and demand. When inventories are high and storage is scarce, the market tends to be in contango, with the steepness of the curve reflecting the value that the market places on storage capacity. When inventories are low, the convenience yield rises and the market may move into backwardation.

The oil market of 2020 provided an extreme illustration. As demand collapsed and storage filled, the front-month contract traded at a deep discount to later contracts, and at one point the front-month price turned negative, reflecting the cost of taking delivery of a physical barrel that had nowhere to go. This episode demonstrated that contango is not merely a theoretical construct but a condition with direct and dramatic consequences for traders.

== Trading Strategies ==
Contango creates opportunities and risks for traders. A trader who expects the curve to flatten can profit by buying deferred contracts and selling nearby contracts, a position that benefits if the curve flattens or moves into backwardation. Such positions are known as calendar spreads.

Exchange-traded funds that track commodity prices are affected by contango, since they must roll their positions as contracts expire. The roll cost reduces the return of these funds relative to the spot price, and the effect can be large when contango is steep. This has led to the development of funds that seek to mitigate the roll cost by choosing maturities or by using different index methodologies.

Producers and consumers use the shape of the curve in their hedging decisions. A producer who sells forward benefits from the higher prices that contango implies, while a consumer who buys forward faces the same higher prices. The curve therefore influences the willingness of each side to hedge and the terms on which they do so.

== Historical and Institutional Context ==
The concept of contango has a long history in commodity markets, and the terminology itself reflects the practices of nineteenth-century trading. The term is often contrasted with backwardation, and the pair is used to describe the normal and the inverted states of the market.

Institutional factors influence the curve. The rules of exchanges, the availability of storage, and the participation of financial investors all affect the relationship between spot and forward prices. The growth of index investment in commodities has been debated for its effects on the curve and on spot prices, though the evidence is mixed.

The measurement of contango requires careful attention to the contracts being compared. Different delivery locations, different qualities, and different contractual terms can produce different price relationships, so that statements about contango must be specific about the market and the contracts in question.

== Summary ==
Contango is a fundamental feature of forward markets, reflecting the costs of carrying an asset through time and the balance of supply and demand. It shapes the returns of investors, the incentives of hedgers, and the economics of storage, and it is monitored closely because it conveys information about the state of the market.

== See also ==
* [[Forward Premium]]
* [[Commodity Money]]
* [[Market Failure Theory]]

== References ==

<ref name="r1">Research on commodity futures markets and the term structure of prices.</ref>
<ref name="r2">Studies of the cost of carry and of convenience yield.</ref>
<ref name="r3">Analyses of storage, inventories, and the shape of the forward curve.</ref>

<references />

[[Category:Foreign exchange market]]
[[Category:Financial economics]]
[[Category:Market structure]]

Contango - Revision history

Youku: New encyclopedia entry (batch upload)

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