Contango

When a market is in contango, each successive delivery month on the futures curve trades at a higher price than the one before it. The gap typically represents what it costs to own the physical commodity today — warehousing fees, insurance, and financing — rather than simply agreeing to receive it later. Traders and economists often call these combined costs the "cost of carry." You can explore the broader mechanics in our guide to contango and backwardation.

A concrete hypothetical: suppose crude oil trades at $80 per barrel in the spot market today. If storing a barrel for three months costs $2, a three-month futures contract might trade around $82. That $2 premium is the market pricing in real-world storage economics, not a prediction that oil will reach $82. Contango is very common in commodities like oil and natural gas, where physical storage is expensive and capacity is finite.

A common confusion is reading contango as a bullish or bearish signal. It is neither — it is primarily a reflection of storage and financing costs at a given moment. Another frequent misunderstanding involves roll yield: investors holding futures-based products in a contango market continuously "roll" expiring contracts into pricier ones, which creates a drag on returns even when the spot price stays flat. See commodity units and contracts for more on how futures mechanics affect real returns.