What does contango mean in finance?

What does contango mean in finance?

Contango and backwardation are terms used to define the structure of the forward curve. When a market is in contango, the forward price of a futures contract is higher than the spot price. Conversely, when a market is in backwardation, the forward price of the futures contract is lower than the spot price.

What does contango mean for oil?

Contango means that the spot price of oil is lower than future contracts for oil. 1 A futures contract is a legal agreement to buy or sell a physical commodity at some point in the future. The spot market is the current cash trading price for that commodity.

Which is better contango or backwardation?

During Contango as the future price is higher so the profit is maximum when you sell it in the future. During Backwardation as the future price is going to decrease further in the future, purchasing it later for an investor would be a greater profit.

How does contango benefit?

One way to benefit from contango is through arbitrage strategies. For example, an arbitrageur might buy a commodity at the spot price and then immediately sell it at a higher futures price. As futures contracts near expiration, this type of arbitrage increases.

How does contango affect the price of futures funds?

Contango is an issue that comes into play with any investment that is futures-based. Contango is a situation in which the near-month futures are actually less expensive than those that expire later on. As a result, when the roll process is underway, it can easily result in selling low and buying high.

How do you take advantage of a contango market?

Why does contango happen?

Contango is a situation where the futures price of a commodity is higher than the spot price. Contango usually occurs when an asset price is expected to rise over time. That results in an upward sloping forward curve.

Is the oil market usually in contango or backwardation?

Yet, the oil futures curve is currently in “backwardation” which describes the situation when spot prices and the front month futures price (CL1:COM) exceed the futures prices for delivery in months that are further out.

Why is it called contango?

The term originated in 19th century England and is believed to be a corruption of “continuation”, “continue” or “contingent”. In the past on the London Stock Exchange, contango was a fee paid by a buyer to a seller when the buyer wished to defer settlement of the trade they had agreed.

Why do futures trade in contango?

Contango can be caused by several factors, including inflation expectations, expected future supply disruptions, and the carrying costs of the commodity in question. Some investors will seek to profit from contango by exploiting arbitrage opportunities between the futures and spot prices.

Why do markets may trade in contango?

Is oil a backwardation or contango?

The brent curve has broadly remained in backwardation since the beginning of 2021 as OPEC+ began to curtail production to balance the market once the COVID pandemic began. The United States strategic petroleum reserve currently reads 577.5 million barrels which is almost at a ten-year low.

Is crude usually in contango?

Contango is normal for a non-perishable commodity, like crude oil and products, which have a cost of carry.

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