Contango

A description of the shape of a forward curve, not a forecast of price. When each successive delivery month is priced above the one before it, the curve is in contango. When the reverse holds and nearer months are dearer, the curve is in backwardation. The shape is a statement about the relationship between dates, and a market in contango can be rising, falling or flat.

The usual explanation is the cost of carry. Holding a physical commodity between now and a future date costs money in storage, insurance and financing, so a buyer for later delivery expects to pay for the time. Where storage is abundant and financing cheap, that premium widens. Where supply is tight now and buyers compete for immediate barrels or ounces, the near month can trade above the far one and the curve inverts.

The consequence that surprises people concerns instruments and funds that hold near dated futures and roll them. Each roll sells the expiring month and buys a dearer later one, so a curve that stays in contango produces a recurring roll cost that is entirely independent of whether the spot price rose. That is why a fund tracking a commodity can lag the commodity itself over a long hold. How much of the curve's shape is carry and how much is the market's expectation of future prices is a genuinely old argument in commodity economics, and it has not been settled.