Contango and Backwardation
Contango is when futures prices are above the spot price, typically rising with later expiries; backwardation is when futures trade below spot.
Contango and backwardation describe the shape of a futures curve. In contango, later contracts cost more than nearer ones; in backwardation, later contracts cost less. The shape tells you about storage costs, supply tightness and what it costs to keep a futures position rolled.
- Category
- Derivatives
- Reading time
- 4 min
- Also called
- Futures curve shape, Forward curve structure, Normal and inverted futures markets
- Updated
Contango and backwardation in plain words
Contango is when each later futures contract costs more than the one before it; the reverse pattern is called backwardation.1
In backwardation, contracts further out are progressively cheaper.1
Storage is a big driver: when holding the commodity is expensive, later deliveries tend to be priced higher — contango.2
How to read the curve
List contract prices
Write down prices for the front month and several later months.
Compare front and back
Measure the curve with one simple spread: the contract a year out minus the front-month contract.2
Name the shape
Rising prices with time mean contango; falling prices mean backwardation.
Link to inventories
Contango often shows ample supply; backwardation often shows tight supply.
Estimate roll cost
In contango, rolling a long position means selling cheaper and buying dearer contracts.
Watch for shifts
Expect stored barrels to come to market when the curve flips to backwardation, because selling now beats storing.3
Worked examples
Example 1 — Contango curve
Contango of $6Hypothetical oil futures: front month $70, 12 months out $76.
| Front | $70 |
| 12-month | $76 |
| Spread | $76 − $70 = +$6 |
Each later contract is priced higher than the last — the textbook shape of contango.1
Example 2 — Roll cost in contango
$6 lost to rollingA hypothetical trader holds a long front contract at $70 and rolls monthly to a contract $0.50 higher, while spot stays flat.
| Roll cost per month | $0.50 |
| Over 12 months | 12 × $0.50 = $6 |
When futures rise above spot, storing oil to sell later becomes more attractive, which can keep the market in contango.4
Example 3 — Backwardation roll
$3.60 roll gainHypothetical futures: front $80, next month $79.40. A long holder rolls and spot stays flat.
| Roll gain per month | $80 − $79.40 = $0.60 |
| Over 6 months | 6 × $0.60 = $3.60 |
Prices fall as delivery dates get further away — that is backwardation.1
Contango vs backwardation
| Aspect | Contango | Backwardation |
|---|---|---|
| Curve shape | Later months higher | Later months lower |
| Typical supply signal | Ample stocks | Tight stocks |
| Roll for long holders | Usually costs money | Usually earns money |
| Storage incentive | Stronger | Weaker |
Where curve shape matters
Commodity ETFs
Funds that roll Futures Contract lose or gain from the curve.
Cash-and-carry trades
Buy Spot Trading supply, sell later futures, store in between.
Crypto futures
Premiums on dated contracts and Funding Rate on Perpetual Futures show similar sentiment.
Hedge planning
Producers using Hedging check which months pay best.
Advantages and disadvantages
Advantages
- Quickly shows supply tightness.
- Helps estimate roll costs before trading.
- Points to storage and carry opportunities.
- Works across oil, grains, metals and crypto.
Disadvantages
- Shape can flip quickly.
- Roll losses in contango can be large over time.
- Storage limits make arbitrage hard for most traders.
- Curve shape is not a price forecast.
Going deeper
Read as far as you need. Each level builds on the one before it.
Why storage matters
Beginner
Contango often shows up when storage is costly or nearly full, because later deliveries must cover those costs.2
Measuring the spread
Intermediate
A common gauge is the gap between the front-month contract and the contract twelve months out.2 A rising spread means deeper contango.
Floating storage
Advanced
In steep contango, traders can buy oil now, sell a later futures contract and store the cargo — on a ship if needed — locking in a return.2 That trade helps cap how steep the curve can get.
Common mistakes
Treating contango as bullish
Higher later prices often reflect carry costs, not a forecast.
Ignoring roll costs
Long-only futures funds can lag spot in contango.
Using one contract
The curve shape needs several maturities.
Assuming it lasts
Curves can switch between shapes within weeks.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Contango means later futures cost more.
- Backwardation means later futures cost less.
- Storage costs and inventories shape the curve.
- Rolling long positions costs money in contango.
- Curve shape is a supply signal, not a forecast.
Frequently asked questions
Is contango normal?
Can crypto be in backwardation?
Does backwardation mean prices will fall?
Further learning
- Futures Contract
How dated contracts work.
- Funding Rate
The perpetual-swap cousin of curve premium.
- Hedging
Using the curve to plan hedges.
- Spot Trading
The price the curve starts from.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- CFTC. CFTC Glossary (opens in a new tab) Checked .
- U.S. Energy Information Administration. High inventories help push crude oil prices to lowest levels in 13 years (opens in a new tab) Checked .
- U.S. Energy Information Administration. This Week in Petroleum (October 3, 2018) (opens in a new tab) Checked .
- U.S. Energy Information Administration. What drives crude oil prices: Balance (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.