12 June 2022 16:13

Isn’t this graph of contango wrong?

Is contango bullish or bearish?

bullish

Contango refers to a situation where the futures price of an underlying commodity is higher than its current spot price. Contango is considered a bullish sign because the market expects that the price of the underlying commodity will rise in the future and as such, participants are willing to pay a premium for it now.

Is contango or backwardation normal?

Contango is when the futures price is above the expected future spot price. A contango market is often confused with a normal futures curve. Normal backwardation is when the futures price is below the expected future spot price. A normal backwardation market is often confused with an inverted futures curve.

Is the oil market in contango or backwardation?

The brent curve has broadly remained in backwardation since the beginning of 2021 as OPEC+ began to curtail production to balance the market once the COVID pandemic began. The United States strategic petroleum reserve currently reads 577.5 million barrels which is almost at a ten-year low.

Why does contango happen?

Contango is a situation where the futures price of a commodity is higher than the spot price. Contango usually occurs when an asset price is expected to rise over time. That results in an upward sloping forward curve.

How do you profit from contango?

Placing a Spread Trade

Another way for traders to profit off a contango market is to place a spread trade. Going back to the example, say a trader believes that the spot price of oil will go even lower versus the future month’s contract. A trader would short the spot month contract and buy the further out month.

How do you know if a market is in contango?

Contango and backwardation are terms used to define the structure of the forward curve. When a market is in contango, the forward price of a futures contract is higher than the spot price. Conversely, when a market is in backwardation, the forward price of the futures contract is lower than the spot price.

How do you trade contango and backwardation?

Most contango and backwardation contracts fall within the commodities market, but you can also trade forex and index forwards. Consider your trading strategy. One way to trade contango is to go short or sell at spot price and then go long or buy a further out contract.

What would cause a futures market to move from contango to backwardation?

The opposite of backwardation is contango, where the futures contract price is higher than the expected price at some future expiration. Backwardation can occur as a result of a higher demand for an asset currently than the contracts maturing in the future through the futures market.

Are oil futures in backwardation?

Right now, Brent crude, the international benchmark oil price, is trading at its most severe backwardation since futures prices have been tracked, UBS strategists wrote on Thursday. In fact, they call it “super backwardation.”

Why is contango normal?

Contango is normal for a non-perishable commodity that has a cost of carry. Such costs include warehousing fees and interest forgone on money tied up (or the time-value-of money, etc.), less income from leasing out the commodity if possible (e.g. gold).

Why is Bitcoin in contango?

Bitcoin futures listed on the Chicago Mercantile Exchange are in contango, meaning the contract expiring at the end of January trades at a lower price than futures with later maturities. The ETF also has a 0.95% annual fee.

What does contango mean for oil markets?

A contango market occurs when prompt crude oil prices fall below those further out in the future. There are futures contracts for each month going out many years. These prices reflect the market’s current as well as future expectations of oil prices.