What causes contango and backwardation?
The opposite of backwardation is contango, where the futures contract price is higher than the expected price at some future expiration. Backwardation can occur as a result of a higher demand for an asset currently than the contracts maturing in the future through the futures market.
What does the word contango mean?
Contango is a situation where the futures price of a commodity is higher than the spot price. Contango usually occurs when an asset price is expected to rise over time. That results in an upward sloping forward curve.
Is backwardation bullish or bearish?
bullish
Backwardation is theoretically a bullish sign for oil, because it means traders no longer have an incentive to store oil and sell it at a later date. Instead, it’s best for them to sell oil now because prices could be lower in the future.
Why are futures more expensive?
Futures prices take into account expectations of supply and demand and production levels, among other factors. The difference in a commodity’s spot price and the futures price at any given time is attributable to the cost of carry and interest rates.
How do you benefit from backwardation?
In order to profit from backwardation, traders would need to buy a futures contract on gold that trades below the expected spot price and make a profit as the futures price converges with the spot price over time.
Why is it called contango?
The term originated in 19th century England and is believed to be a corruption of “continuation”, “continue” or “contingent”. In the past on the London Stock Exchange, contango was a fee paid by a buyer to a seller when the buyer wished to defer settlement of the trade they had agreed.
Is oil a backwardation?
Right now, Brent crude, the international benchmark oil price, is trading at its most severe backwardation since futures prices have been tracked, UBS strategists wrote on Thursday. In fact, they call it “super backwardation.”
What does extreme backwardation mean?
When oil futures trade at lower levels than spot prices and near-term futures, that’s known as backwardation. Mario Tama/Getty Images. Traders like charts that point up and to the right. They signal optimism and big returns. Right now, the oil futures curve is pointed sharply in the other direction.
What is the difference between backwardation vs contango?
Let’s see the top differences between backwardation vs Contango along with infographics. Backwardation occurs when the pre-determined spot price goes higher than the futures price, whereas Contango takes place when the pre-determined spot price goes lower than the futures price.
What is contango in futures?
Contango is when the futures price is above the expected future spot price. A contango market is often confused with a normal futures curve. Normal backwardation is when the futures price is below the expected future spot price.
What is the meaning of contango?
Contango describes an upward sloping curve where the prices for future delivery are higher than the spot price (e.g., the price of gold delivered in 1 year is $1,400/oz and the spot price is $1,200/oz). Contango is common in the gold industry, where the commodity is non-perishable and there are storage costs. Contango exists…
Why does contango or forwardation take place?
There are various reasons as to why Contango or forwardation takes place. These reasons are COC, ROI or rate of interest, oversupply for futures or spot asset, financing costs, insurance costs, storage costs, excessive demand for futures or spot asset, etc.