Contango

In the futures market, contango refers to a market condition where the price of a futures contract for delivery at a later date is higher than the spot price for the underlying commodity. This means that the price for future delivery is higher than the price for immediate delivery, creating a positive slope in the futures curve.

For example, let's say the current spot price for a barrel of oil is $50, but the price for delivery in 6 months is $55. This would create a contango market, as the price for future delivery is higher than the spot price.

This can occur for several reasons, one of the most common is that there is an oversupply of the commodity currently and more sellers than buyers in the market, causing the spot price to decrease. At the same time, the expectation is that demand for the commodity will increase in the future, causing the price for future delivery to be higher.

A good example was the beginning of the pandemic when oil prices fell to extremely low levels due to a lack of supply but the forward curve was much higher on the expectation that demand would return.

Contango can also occur when the cost of carrying the commodity is higher than the interest earned on the cash received for selling the futures contract. This can happen when the storage costs, such as rent and insurance, are high, and the interest earned on cash is low.

As a trader, a contango market can be an opportunity to sell futures contracts for future delivery at a higher price than the spot price, with the expectation that the price will decrease in the future.