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Contango and Backwardation
are terms used in certain energy and commodity markets to describe the shape of
the forward curve. They are used especially in the
crude oil market. Contango is a condition where
forward prices exceed spot prices,
so the forward curve is upward sloping. Backwardation is the opposite condition, where
spot prices exceed forward prices, and the forward curve slopes downward.
In oil markets, the prevailing
condition may reflect immediate supply and demand. If crude oil is contango,
this may indicate immediately available supply.
Backwardation can indicate an immediate shortage. Anything that threatens
the steady flow of oil around the world, such as imminent war, tends to
drive the oil market into backwardation. |
