Commodities

Contango

A futures-curve structure where longer-dated contracts trade above the spot price — typical of well-supplied physical markets.

Definition

In contango, each successive futures contract is more expensive than the prior one. This shape compensates storage and financing costs and signals that the market doesn't need supply urgently.

ETFs that roll futures (like USO for oil) suffer 'negative roll yield' in contango — they sell cheap front-month and buy expensive back-month each period.

Why it matters

Contango destroys returns for naive long-commodity ETF holders. It also signals weak physical demand, which has implications for the broader cycle.

Worked example

April 2020 oil: WTI front-month settled at −$37 while back-months stayed positive — a super-contango. USO ETF lost ~70% over the following year despite oil prices recovering, due to roll losses.

Frequently asked

What causes contango?⌄

Adequate or excess physical supply, low storage costs, and weak prompt demand.

How do you trade contango?⌄

Long back-month vs short front-month (calendar spread), or short ETFs subject to negative roll.

Does contango always mean bearish?⌄

Not directly — it reflects current physical balance. A market can be in contango and rally if the curve flattens.

What's super-contango?⌄

Extreme contango where storage profits are large enough to justify holding inventory specifically to sell forward.

Related terms

Backwardation

Commodities

Crack Spread

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Calendar Spread

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OPEC+ Cut Mechanics

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