Oil Prices: Contango vs. Backwardation
A contango market occurs when prompt crude oil prices fall below those further out in the future. There are futures contracts for each month going out many years. These prices reflect the market’s current as well as future expectations of oil prices.
Plotted in a chart with time on the x-axis and oil prices on the y-axis, these points create what is called the oil price ‘curve’.
A quick plotting of current oil prices by month(including the recent rebound) produces a curve like this :
Contango is normal for a non-perishable commodity, like crude oil and products, which have a cost of carry. Such costs include storage fees and interest forgone on money that is tied up in inventory.
The opposite of contango is a backwardated market, where there is a premium on current oil prices over the future. This occurs when there is increased demand for a product NOW, as has been the case in an expanding global economy post financial crisis.
A market that is steeply in backwardation often indicates a perception of current shortage in the commodity.
A backwardated oil price curve might look like this:
Oil Prices Today
Our daily newsletter offers insight into the news and events that drive oil prices today.