Contango Explained: What It Is, What Causes It, and Why It Matters

Contango defined Contango is a condition in commodity futures markets where the price of a futures contract is higher than the current spot price for the same commodity. It is the normal state for most physical commodities because buyers are willing to pay more for future delivery than for immediate delivery. That premium reflects the real costs of storing, financing, and insuring a commodity over the delivery period. Contango is the opposite of backwardation.

Table of Contents

1. What Contango Actually Means
2. Why Contango Exists: The Three Costs
3. The Futures Curve in Contango
4. Worked Example: Crude Oil in Contango
5. Backwardation: The Opposite Condition
6. Roll Yield: How Contango Erodes ETF Returns
7. What Contango Means for Importers and Merchants
8. Frequently Asked Questions
9. Key Takeaways

What Contango Actually Means

Picture a warehouse full of crude oil. You can sell that oil today at $80 per barrel — the spot price. Or you can agree to sell it in six months for $84 per barrel — the six-month futures price. Because the futures price ($84) is higher than the spot price ($80), the market is in contango.

The difference between the two prices is called the contango premium. In this case, that’s $4 per barrel over six months, or roughly 5%.

Contango is not a sign of alarm. It is the normal, expected state for most physical commodities. The reason: physical commodities cost money to store and finance between now and the delivery date. Buyers who want delivery later have to compensate sellers for those costs.

The term “spot price” means the price for immediate delivery and payment. The “futures price” is the agreed price for delivery at a specified future date. When futures prices are progressively higher for each successive delivery month, the full futures curve is said to be in contango.

Why Contango Exists: The Three Costs

Three factors push futures prices above spot prices, creating contango.

Storage costs are the most obvious. Physical commodities — crude oil, natural gas, grain, copper — have to be stored somewhere between now and delivery. Tank farms, grain elevators, and warehouses all cost money. The longer the storage period, the higher the cost, and the higher the futures price relative to spot.

Financing costs add to the premium. To hold a physical commodity you either tie up capital (the cash you spent buying it) or borrow money. Either way there is an interest cost. At a 5% annual interest rate, holding $80/barrel oil for six months costs roughly $2 per barrel in financing alone.

Insurance and other carrying costs round out the picture. Stored commodities need to be insured against loss, fire, or theft. Crude oil in tanks, grain in elevators, copper in warehouses — all require insurance coverage for the duration.

Together, these three elements make up the cost of carry — the total cost of holding a physical commodity from now until a future delivery date. In a well-functioning market, the contango premium should roughly equal the cost of carry. If futures prices are much higher than the cost of carry, it becomes profitable to buy the physical commodity today, store it, and sell it forward. That arbitrage activity pushes futures prices back in line.

One subtlety: some commodities have a convenience yield — a premium that holders of physical stock are willing to accept because holding the actual commodity provides operational benefits. A refinery that holds crude oil inventory avoids production shutdowns if supply is disrupted. That operational value reduces the contango premium and sometimes eliminates it entirely, tipping the market into backwardation.

The Futures Curve in Contango

If you plot futures prices against delivery months on a chart, you get the futures curve (also called the forward curve).

In contango, this curve slopes upward from left to right. The nearest delivery month sits at the lowest price (close to spot), and each successive month sits progressively higher. The curve looks like a gentle hill rising steadily to the right.

For example, crude oil futures during a supply glut might look like this:

Delivery Month	Price ($/barrel)
Spot	$80.00
1 month	$80.80
3 months	$82.00
6 months	$84.00
12 months	$87.50

Each monthly price exceeds the previous one by roughly the monthly cost of carry. The curve is in full contango across all delivery months.

In backwardation, that same curve slopes downward — the nearest month is the most expensive, and prices fall as you move further out.

Markets can be in contango on the near end of the curve and backwardation further out, or vice versa. The shape of the curve tells you a great deal about current market conditions and near-term supply and demand balance.

Worked Example: Crude Oil in Contango

In early 2020, when COVID-19 collapsed global demand and oil production cuts hadn’t yet kicked in, crude oil markets entered extreme contango. The following illustrative example captures the structure that existed.

Suppose WTI crude oil (West Texas Intermediate, the US benchmark) is trading at:

• Spot price: $20.00 per barrel
• 1-month futures: $23.00 per barrel
• 2-month futures: $25.50 per barrel
• 6-month futures: $32.00 per barrel

The contango between spot and the 6-month contract is $12.00 per barrel — 60% above spot.

A physical oil trader sees this and thinks: can I profit? To do so they would:

1. Buy physical crude at $20/barrel.
2. Pay for a crude oil storage tank (Cushing, Oklahoma had almost no spare capacity in April 2020 — traders were even chartering supertankers as floating storage at $300,000/day).
3. Sell a 6-month futures contract at $32/barrel, locking in the forward price.

If storage costs $1.50/barrel for six months and financing costs another $0.50/barrel, total cost of carry is $2.00/barrel. The profit is $32.00 – $20.00 – $2.00 = $10.00 per barrel.

That trade — buy physical, store it, sell forward — is called a cash-and-carry arbitrage. It is very real and executed regularly by major oil merchants. In April 2020 the contango was so extreme that traders ran out of storage options, which itself became a major news story.

Backwardation: The Opposite Condition

Backwardation is when the spot price is higher than the futures price. The futures curve slopes downward. A commodity in backwardation is typically in tight supply right now, with buyers paying a premium for immediate delivery.

Oil markets frequently flip between contango and backwardation. Crude oil was in strong backwardation through much of 2022 when supply was tight relative to demand. The six-month futures price might be $5 lower than spot, meaning buyers were paying a premium to receive oil today rather than wait.

Backwardation signals:

• Supply is tight relative to current demand.
• Holders of physical inventory have high convenience yield — they don’t want to sell now.
• The market expects prices to fall as supply catches up.

Contango signals:

• Supply is ample or oversupplied.
• Storage is available and cost-effective.
• Producers and traders are willing to store and sell forward.

Agricultural markets behave differently from energy markets. Corn and soybeans often shift between contango and backwardation seasonally — grain is cheap at harvest (high supply), but old-crop grain approaching the next harvest commands a premium if new-crop supply is uncertain.

Roll Yield: How Contango Erodes ETF Returns

This section matters if you work with commodity index funds or ETFs, or if your company tracks commodity indices for budget planning.

Most commodity ETFs do not hold physical commodities. They hold futures contracts. When a futures contract approaches expiration, the ETF must sell the expiring contract and buy the next month’s contract. This is called rolling the position.

In a contango market, the next month’s contract is more expensive than the expiring contract. Every time the ETF rolls forward, it sells low and buys high. The loss from each roll is called the negative roll yield.

Here is a concrete example:

• An oil ETF holds the 1-month WTI futures contract, currently at $80/barrel.
• The 2-month contract (the one the ETF will roll into) is at $82/barrel.
• The ETF sells at $80 and buys at $82 — it loses $2 per barrel on every roll.

If the spot price of oil stays exactly flat over a year and the ETF rolls 12 times, the ETF could still lose 10-15% of its value purely from roll costs. This is why commodity ETFs in persistent contango markets often significantly underperform the spot price over time.

The US Natural Gas ETF (UNG) is the most famous example. Between 2009 and 2016, spot natural gas prices were essentially flat. But UNG lost roughly 90% of its value because natural gas futures were in steep, persistent contango and the roll costs compounded massively over years.

For a shipping or trade finance professional, this matters when your company uses commodity indices for budget benchmarks. An index that tracks futures prices will diverge significantly from spot prices in contango markets. Always clarify whether a benchmark is spot-based or futures-based.

What Contango Means for Importers and Merchants

For Jamie working in import logistics or commodity sourcing, contango is not just a finance concept. It has direct implications for purchasing decisions and storage strategy.

Should you buy forward in a contango market?

Suppose you are an edible oil importer and palm oil is in contango. The spot price is $900/tonne and the 6-month forward price is $940/tonne. The contango premium is $40/tonne.

You have two options:

1. Buy spot and store the oil yourself ($30/tonne storage costs for six months).
2. Buy forward at $940/tonne and let your supplier store it.

In this case, storing yourself is cheaper — you pay $930 ($900 + $30) versus the forward price of $940. You would buy spot and store.

If your storage costs were $50/tonne, the calculation reverses. The forward contract at $940 is cheaper than $950 ($900 + $50). You would buy forward.

Contango and storage decisions for merchants

A commodity merchant — a company that buys, stores, and resells physical commodities — profits from contango when the futures premium exceeds their cost of carry. This is the core of the “carry trade” in physical commodities.

Large merchants like Trafigura, Vitol, and Glencore actively exploit contango by filling storage tanks when the futures curve offers sufficient premium. This activity is economically useful — it smooths supply over time and reduces price volatility.

Backwardation and storage decisions

In backwardation, storage is penalised. If you store oil and the futures price is below spot, you are locking in a loss. Merchants in a backwardated market therefore minimise inventory and sell promptly.

For importers, backwardation means suppliers have pricing power for near-term delivery. It signals tight supply and suggests that locking in forward purchases at a discount could protect against near-term price spikes.

Frequently Asked Questions

What is the simplest definition of contango?

Contango means the futures price for a commodity is higher than the current spot price. The market is “in contango” when you pay more to buy a commodity for future delivery than you would pay to buy it today.

What is the difference between contango and backwardation?

In contango, the futures price is above the spot price. In backwardation, it is below. Most commodity markets are in contango most of the time because of storage and financing costs. Backwardation typically occurs when supply is tight and buyers are willing to pay a premium for immediate delivery.

Does contango mean prices are going up?

No. Contango is about the relationship between today’s spot price and futures prices for future delivery dates. It does not predict whether the spot price itself will rise or fall. A market can be in contango while the spot price is falling.

Why does contango hurt commodity ETFs?

Commodity ETFs hold futures contracts rather than physical commodities. When they roll expiring contracts into the next month, they sell at a lower price and buy at a higher price in a contango market. The loss from each roll — called negative roll yield — compounds over time and can significantly erode returns even if the spot price stays flat.

Is contango good or bad for producers?

It depends on the producer’s position. Producers who hedge by selling futures lock in the higher futures price, which is favourable when markets are in contango. However, if they wait for spot to converge upward to the futures price, that convergence often doesn’t materialise — spot prices don’t necessarily rise to meet forward prices.

How does contango affect an importer’s buying decision?

An importer compares the cost of buying spot and storing the commodity themselves against buying forward at the futures price. If the futures price (contango premium) exceeds the importer’s storage costs, buying spot and storing is cheaper. If storage is expensive or limited, buying forward makes more sense.

What commodity is most often used to explain contango?

Crude oil is the most common example because it has visible, actively traded futures contracts across many delivery months, large and transparent storage capacity, and has experienced dramatic swings between contango and backwardation that were widely reported (especially in April 2020 when WTI spot briefly went negative).

Key Takeaways

• Contango means futures prices are higher than the current spot price — it is the normal condition for most physical commodities.
• The contango premium reflects the cost of carry: storage costs, financing costs, and insurance between now and the delivery date.
• A futures curve in contango slopes upward to the right when you plot delivery months against prices.
• Backwardation is the opposite — spot prices are higher than futures prices, signalling tight near-term supply.
• Commodity ETFs suffer negative roll yield in contango markets because they repeatedly sell expiring contracts below the price of the next contract they must buy.
• For importers and merchants, contango creates a calculation: is it cheaper to buy spot and store, or buy forward at the futures price?
• Large commodity merchants exploit contango by filling storage when the futures premium exceeds their cost of carry — this is the physical commodity carry trade.
• Contango does not predict whether prices will rise or fall; it describes the current relationship between spot and futures prices.

Related Reading

To deepen your understanding of the topics covered in this article, explore these related guides: the inverse market structure where near-term prices trade higher, how the term structure of prices is plotted and interpreted and the difference between immediate and forward delivery pricing.