Contango vs Backwardation
Contango: when later contracts cost more
When you hear about contango and backwardation, you're really looking at the two patterns commodity futures can follow. In contango, contracts for future delivery trade above spot, and they're pricier than contracts that settle sooner. You'll see this setup in markets where supply isn't short and there are tanks or warehouses to store what gets mined, drilled, or harvested. Those storage spaces aren't free. Carrying costs like storage fees and financing charges get built into the price, so the longer you want to wait for delivery, the more you pay. If you see contango, that signals space and supply aren't under pressure at the moment.
Backwardation: when the nearest month trades higher
Sometimes, buyers need oil or gas now and can't wait. That's backwardation. The front-month contract climbs above later months, sometimes even above spot, because someone's willing to pay to secure current supply. A high convenience yield, what users gain by holding the commodity rather than a futures contract, can widen the gap. In tight markets, you see backwardation. But, prices can still fall from here; this shape doesn't predict direction, just pressure on the current balance of what’s available and what’s wanted.
Examples from oil and gas: market shifts
Let's look at oil. The curve doesn't stay put, it moves based on real-world events. In April 2020, for WTI crude, lack of storage got so intense that the front-month contract ended below zero. That wasn't normal, but it showed just how much storage and logistics matter. For gas, when winter's coming and stocks are low, you’ll see the nearest contracts priced higher than later ones. When storage tanks are full, later contracts can get expensive compared to near-term delivery instead. Demand, storage reports, and season keep re-shaping the futures curve. For the major oil benchmark’s recent moves, see our Brent oil price page.
Frequently asked questions
Is contango good or bad for commodity investors?
It depends on what you hold and for how long. Contango can eat into returns for users of futures-backed products, because you might be selling a cheaper expiring contract to buy a more expensive one further out (a roll cost). That doesn't say whether you’ll gain or lose, since commodity prices swing and other risks matter. Read each product’s documentation and ask a licensed adviser before acting. Commodity investing isn’t risk free.
Does backwardation mean prices will rise?
No, it doesn’t. Backwardation just reports current tightness, not tomorrow’s direction. Spot might rise or drop after the curve backwardates. Curves shift quickly if stocks refill or demand cools. If you want to see how spot and futures interact, our guide to spot vs futures prices explores that in more detail.