Contango and backwardation

Contango and backwardation describe the shape of a futures curve. In contango, futures contracts for later delivery dates trade above the current spot price and above nearer-dated contracts, so the curve slopes upward. In backwardation, later-dated contracts trade below nearer-dated ones and below spot, so the curve slopes downward.

Contango is the more common state for many commodities and reflects the cost of storing, financing, and insuring the physical asset until the later delivery date, sometimes offset by a "convenience yield" from holding physical supply. Backwardation typically signals near-term scarcity, when buyers pay up for immediate delivery relative to the future, such as during a supply disruption. The distinction is separate from a currency's forward points premium or discount, though both arise from a similar cost-of-carry logic.

The shape matters directly for anyone holding a rolling futures position, including many commodity index funds: rolling a contract forward in contango means selling a cheaper near contract and buying a pricier far one, a drag known as negative roll yield, while backwardation produces positive roll yield. A common misreading is assuming contango or backwardation predicts the direction of the spot price; it describes the current curve shape and carry cost, not a forecast.