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A contango market is also known as a normal market or carrying-cost market. The opposite market condition to contango is known as backwardation. "A market is 'in backwardation' when the futures price is below the expected spot price for a particular commodity.
In practice, the expected future spot price is unknown, and the term "backwardation" may refer to "positive basis", which occurs when the current spot price exceeds the price of the future. [3]: 22 The opposite market condition to normal backwardation is known as contango. Contango refers to "negative basis" where the future price is trading ...
Futures prices tend to be in contango; The volatility of spot and futures prices tend to be low, and futures premiums rise to the full cost of storage; When supplies are tight, and purchasing managers build production inventory levels to ensure availability, Futures prices tend toward backwardation
Markets are said to be normal when futures prices are above the current spot price and far-dated futures are priced above near-dated futures. The reverse, where the price of a commodity for future delivery is lower than the expected spot price is known as backwardation. Similarly, markets are said to be inverted when futures prices are below ...
Forward/futures prices converge with the spot price at maturity, as can be seen from the previous relationships by letting T go to 0 (see also basis); then normal backwardation implies that futures prices for a certain maturity are increasing over time. The opposite situation, where () <, is referred to as contango. Likewise, contango implies ...
Backwardation indicates the futures curve is falling, with spot markets and short-term futures contracts priced higher than longer-dated contracts.
They are never contango or normal backwardation themselves. Contango/Normal backwardation is what happens to those curves in relation to the expected spot price as time goes by. While it is often true that a certain type of futures curve results in a contango, they are not the same (cf. a beginning state vs the resulting process).
The oil-storage trade, also referred to as contango, is a market strategy in which large, often vertically-integrated oil companies purchase oil for immediate delivery and storage—when the price of oil is low— and hold it in storage until the price of oil increases. [1]