Contango and Backwardation

Contango and backwardation describe the shape of a futures curve. A market is in contango when contracts for later delivery trade above nearer ones, which is typical when storage and financing costs dominate; it is in backwardation when later contracts trade below nearer ones, often when immediate supply is scarce and buyers pay a premium for prompt delivery. The shape matters to anyone holding a rolling commodity or index CFD, because each roll from an expiring contract into the next one happens at a different price. In contango the roll usually costs the holder of a long position over time, while backwardation tends to work in the long position's favour. Brokers apply a cash adjustment so the roll itself creates no artificial profit or loss.