Contango and backwardation, explained
In one line: Contango is when futures for later dates cost more than nearby ones. Backwardation is when later dates cost less.
A simple example
Imagine these crude oil (CL) futures prices on one day. These are made-up numbers for illustration:
| Contract | Price |
|---|---|
| December | $70.00 |
| March | $71.20 |
| June | $72.40 |
Prices rise the further out you go. That's contango.
Now flip it: December $70.00, March $68.80, June $67.60. Later contracts are cheaper. That's backwardation.
Why later prices can be higher
Holding a real barrel of oil costs money. You pay for storage, insurance and the interest on the cash tied up. Futures for later months often price those costs in. That's the normal state for many commodities.
Why they can be lower
When buyers need the thing right now, they pay extra for nearby delivery. A supply shortage or high demand pushes the near contract above the later ones. That's backwardation.
The most famous extreme: in April 2020, storage for crude oil filled up and the May WTI contract settled at about minus $37 a barrel on its last days. People holding it had nowhere to put the oil.
Why it matters
- Rolling. When you move from one Futures contract to the next, the new one sits at a different price. In contango you "buy higher" each roll. See Contract rollover.
- Funds that hold futures. Some commodity ETFs roll contracts every month. In steady contango that roll can slowly drag on returns, even if the spot price stays flat.
- Charts. A continuous chart can show a jump on roll day that is just the price gap between contracts.
The crude oil futures page shows how this plays out in that market.
A common mistake
Thinking contango predicts a rise. A higher price for June doesn't mean oil will reach that price by June. It mostly reflects carrying costs and today's supply and demand. Read your own chart, not the curve, for trade decisions.
Questions
Is contango good or bad?
Neither. It's a normal shape for many futures markets. It matters most if you hold through several rolls, where the price gaps add up.
Does contango happen in bitcoin futures?
Often, yes. Bitcoin futures on CME have frequently traded above spot, partly because of the cost of holding cash. It can flip at times.
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