Commodities & indices · Intermediate

Contango And Backwardation Explained

The futures curve is not a forecast. It is a storage bill, and a position held across a roll pays or collects it every month.

Last reviewed 15 September 2026 by the MarketPro research desk · Editorial policy

In short

Contango is a futures curve where later delivery months trade above nearer ones, usually because storage, insurance and financing cost money. Backwardation is the reverse, where immediate delivery commands a premium because the physical market is tight. A rolling long position loses the spread each month in contango and gains it in backwardation, which is why returns on a rolling commodity position can differ sharply from the spot price move.

What to remember

A 0.77% monthly roll spread compounds to about 9.6% a year. That is the hurdle a long position clears before the spot view earns anything.
The curve describes storage economics and current tightness, not future direction. Deep contango markets have rallied and backwardated ones have crashed.
On 20 April 2020 the expiring WTI month settled at minus 37.63 USD while the next month traded near 20 USD, a 58 dollar gap on the same commodity.
Rolling CFDs are not exempt. The broker applies a cash adjustment at each roll, so you pay the curve whether or not you rolled anything yourself.
Metals curves track interest rates closely, so a long gold position's roll cost rises when short rates rise.

Lesson 6 of 16 in Commodities and indices

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Contango is a futures curve where later delivery months cost more than nearer ones. Backwardation is the opposite, where the nearest month is the most expensive. The distinction matters because a commodity position held across a roll earns or pays that spread every time it rolls, whether or not the spot price does anything at all. This is the reason a long crude position can lose 9% in a year while crude ends the year exactly where it started.

The 60 cent gap that costs 9% a year

Suppose front-month WTI trades at 78.00 and the next month at 78.60. That 60 cent spread is 0.77% of the price. To stay long past expiry you sell the 78.00 contract and buy the 78.60 one, so you now hold the same barrel exposure at a higher entry. The spot price has not moved. Your cost basis has risen by 0.77%.

Do that twelve times and the drag compounds to roughly 9.6% over the year. On 1,000 barrels of exposure, that is about 7,500 USD paid out of a position that was, on the spot price, flat. The compounding calculator shows how quickly a repeated small percentage accumulates, and roll yield is exactly that mechanism working against you.

Backwardation reverses it. If the front month is at 78.00 and the next at 77.20, rolling sells high and buys low, adding 1.03% to the position each month. A trader who is long a backwardated market collects that spread as a tailwind and can be up on the year with spot unchanged.

Storage, insurance and money: what sets the spread

The curve is not a forecast, despite being read as one constantly. It is mostly an arbitrage relationship. If you can buy a barrel today, pay to store it and insure it for a month, and finance the purchase, then the fair price of a barrel delivered next month is today's price plus those costs. That sum is the cost of carry, and in a well supplied market the spread between months sits close to it.

Storage dominates for bulky commodities. Crude and natural gas have physical tank and cavern limits, and as those fill the marginal cost of a month of storage rises sharply.
Financing matters more when rates are high. At 5% short rates, a month of carry on a 78 USD barrel is roughly 32 cents before storage.
Convenience yield is what pushes a curve into backwardation. A refinery that needs the barrel this week, not next month, will pay a premium for immediate delivery, and that premium is worth more than any storage saving.

So the shape tells you about the physical market's tightness right now. A steep contango usually means abundant supply and filling storage. A steep backwardation usually means the spot market is short.

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April 2020, when two months were 58 dollars apart

On 20 April 2020 the expiring May WTI contract settled at minus 37.63 USD a barrel. The June contract, one month later, was trading around 20 USD. Two claims on the same commodity, separated by four weeks, priced roughly 58 USD apart.

Nothing mysterious happened. Holders of the May contract faced physical delivery at Cushing, Oklahoma, where storage was effectively full, and a barrel you cannot store and cannot use is a liability rather than an asset. They paid to be rid of it. The June contract still had a month for storage to free up, so it kept a positive price.

The lesson for anyone holding rolling exposure is what happened next. Crude's front-month price recovered strongly through the rest of 2020, but a fund or CFD rolling monthly through that extreme contango bought each new month at a large premium to the one it sold. Spot went up a great deal more than a rolling position did. If your view is on the price of oil and your instrument rolls, the curve stands between the two.

How the roll reaches a CFD you never rolled

Traders using CFDs often assume this is a futures problem. It is not. A rolling commodity CFD is priced off a futures month, and when that month expires the broker moves the quote to the next one and applies a cash adjustment for the price difference, so your account reflects the roll whether or not you did anything.

The mechanics are covered in more detail alongside the instruments themselves, but the summary is simple. In contango, the adjustment is a debit against a long position. In backwardation, it is a credit. Overnight financing sits on top of that, and on a position held for months the two together can exceed the move you were trying to capture. Model the holding cost before you decide a commodity trade is a multi-month idea, and use the profit calculator with the carry included rather than the headline price target alone.

What the curve does not tell you

Three misreadings turn up repeatedly. The first is treating contango as a bearish signal and backwardation as bullish. The curve describes storage economics and current physical tightness, not future direction. Markets in deep contango have rallied hard and backwardated markets have collapsed.

The second is assuming the shape is stable. Curves flip. Crude moved from backwardation to historic contango within weeks in early 2020 and back again within a year. A strategy that quietly depends on collecting roll yield is short a regime change.

The third is ignoring the curve on metals. Gold and silver are cheap to store and easy to finance, so their curves are almost always in mild contango tracking interest rates closely, which means the roll cost on a long metals position is largely a rates cost. When short rates rise, so does the drag.

Two things to check before a multi-week commodity trade

Look up the next two delivery months for whatever you are trading and note the spread between them as a percentage of price. Multiply by the number of rolls you expect to sit through. That is the hurdle your view has to clear before you make anything, and it is the number most retail traders never calculate.

Then decide whether the trade is really a spot view. If it is a two-day momentum trade, the curve is irrelevant and you should ignore it. If it is a three-month thesis about supply, the curve may cost you more than you expect to earn, and the honest answer is sometimes that the instrument does not support the idea. Position sizing follows from the same discipline as any other instrument, and the risk management guide sets out the framework.

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Written and reviewed by the MarketPro research desk

MarketPro is a trading-signal and trading-education app operated by Harajuku Holdings LTD (Cyprus). Our signal desk publishes and tracks every trade idea in-app, and every page here is checked against the app's live behaviour before publishing. Last reviewed 15 September 2026. How we produce signals and content · About MarketPro

FAQ

Contango And Backwardation Explained: questions

What does it mean when a commodity is in contango?

It means futures contracts for later delivery trade at higher prices than nearer ones. The usual cause is the cost of carry: storing, insuring and financing a physical commodity for an extra month costs money, so a barrel delivered later is worth more than one delivered now. Steep contango normally signals plentiful supply and filling storage. For anyone holding a rolling long position, it is a recurring cost, because each roll sells a cheaper contract and buys a dearer one.

Why did my oil position lose money when oil went up?

Most likely because of roll yield. A rolling instrument does not track the spot price, it tracks a sequence of futures contracts. In contango, every roll moves you into a more expensive contract, so your cost basis climbs even when the spot price is flat. Across 2020, crude's spot price recovered strongly from its April low while rolling positions captured far less of that move, because the curve was in unusually steep contango for much of the period.

Is backwardation bullish for a commodity?

Not reliably. Backwardation tells you the physical market is tight right now and buyers are paying a premium for immediate delivery, which often coincides with a rising market. But it is a description of current storage and supply conditions, not a forecast. Backwardated markets have fallen sharply once supply arrived. What backwardation does reliably give a long position is a positive roll yield, which is a separate benefit from any price direction.

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