Contango
A market structure where futures prices are higher than the current spot price, creating negative roll yield for long futures holders.
Formula
Contango = (Futures Price − Spot Price) / Spot Price × 100%
A commodity market is in contango when the futures curve slopes upward — deferred contracts trade at a premium to near-dated contracts and to spot. This is the structurally normal state for storable commodities such as crude oil, natural gas, and gold, because holding the physical good incurs storage costs, insurance, and financing.
Contango has a punishing effect on long-only commodity ETFs and passive strategies: as the front-month contract approaches expiration it must be rolled — sold — into the pricier next contract. This continuous process of selling cheap and buying expensive erodes returns even if spot prices are flat. This is negative roll yield.
Traders short the front of the curve or buy physical/spot-replicating instruments to avoid the contango drag. During heavy contango episodes in crude oil (such as 2020), traders chartered supertankers to store physical barrels and earn the spread between spot and futures.
Example
WTI crude spot trades at $78.00/bbl. The 1-month futures is $79.20; the 3-month futures is $81.60; the 6-month futures is $84.00. The $6.00 contango from spot to 6-month means a long ETF rolling monthly loses approximately $1.00/month in roll cost even if spot is unchanged.
Related Terms
Backwardation
A futures market where near-term contracts trade at a premium to deferred contracts, generating positive roll yield and signalling near-term supply tightness.
AdvancedCarry / Cost of Carry
The net cost of holding a physical commodity position — storage, insurance, and financing minus any income or convenience yield.
AdvancedCommodity Index (GSCI / BCOM)
A rules-based basket of commodity futures — the S&P GSCI is production-weighted and energy-heavy; the Bloomberg Commodity Index (BCOM) is diversified with per-commodity caps.
AdvancedFutures Curve
The graph of futures prices across successive delivery months for a commodity, revealing whether the market is in contango or backwardation.
IntermediateInventory Build
A week-over-week increase in reported commodity stockpiles — typically bearish for price as it signals supply outpacing consumption.
IntermediateRoll Yield
The gain or loss generated when rolling a futures position from an expiring contract into the next one, driven entirely by the shape of the futures curve.
AdvancedSpot Price
The current market price at which a commodity can be bought or sold for immediate delivery.
BeginnerSpot-Futures Basis
The difference between the spot price and a futures price for the same commodity — the numerical expression of carry, storage, and convenience yield.
IntermediateStorage Cost
The fees paid to store a physical commodity — tank rental for crude, vault charges for gold — a key driver of contango in storable markets.
Intermediate