Kontango

Kontango is a term used in finance, particularly in commodity markets, to describe a market condition where the price of a futures contract is higher than the spot price of the underlying commodity. This situation implies that the market expects the price of the commodity to rise in the future. The difference between the futures price and the spot price is known as the contango. This difference is typically attributed to the costs associated with holding the physical commodity over time, such as storage fees, insurance, and interest on the capital invested.

When a market is in contango, it generally suggests that there is sufficient supply in the present, but market participants anticipate a shortage or increased demand in the future. This encourages producers to hold onto their current inventory rather than selling it immediately at the lower spot price, as they can profit by selling it at a higher price in the futures market for a later delivery. For investors and traders, contango can impact strategies involving futures contracts. Rolling a futures contract forward in a contango market usually incurs a cost, known as negative roll yield, as the investor sells a near-term contract at a lower price and buys a longer-term contract at a higher price. This is in contrast to backwardation, where futures prices are lower than the spot price, suggesting an expectation of falling prices.