Contango
Contango is a situation where futures prices for a commodity are higher than the spot price, creating an upward-sloping futures curve as maturity extends.
Concept map
Learn, apply, review
Definition
Contango is a situation where futures prices for a commodity are higher than the spot price, creating an upward-sloping futures curve as maturity extends.
Use case
Used in derivatives workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Contango
Contango typically reflects storage costs, financing costs (cost of carry), and convenience yield. It causes negative roll yield for long futures holders — selling expiring contracts at lower prices and buying higher-priced distant contracts. Common in gold and increasingly in oil markets.
Example: Spot crude oil: $80/barrel. 6-month futures: $85. The $5 contango reflects storage and financing costs. An ETF holding oil futures loses ~$5 every 6 months rolling contracts, even if spot oil stays flat — a major drag on commodity ETF returns.