Contango

Contango is common in markets for commodities that are costly to store, such as oil, natural gas and metals. Futures prices for later delivery tend to be higher because they reflect the costs of storing the commodity, insuring it and financing it until delivery.

For example, if crude oil trades at 70 per barrel in the spot market and a futures contract for delivery in six months trades at 73, the market is in contango.

Contango affects investors who hold commodity exposure through futures, such as many commodity exchange-traded funds. As contracts approach expiry, they must be sold and replaced with later contracts at higher prices. This roll process can create losses over time even if spot prices do not change, a cost known as negative roll yield.

Deep contango can signal oversupply, when there is more of a commodity available today than needed. In April 2020, with oil storage nearly full, extreme contango contributed to one US oil futures contract briefly trading below zero.