Contango vs Backwardation: What They Mean for Traders and the Futures Market

Topic Summary: 

• Contango happens when futures prices are higher than today’s price, usually because of storage and financing costs.
• Backwardation is when futures trade cheaper than spot, showing strong current demand or tight supply.
• The curve’s shape helps traders read how the market sees the months ahead.
• Roll yield (what you gain or lose when rolling contracts) is essential for long-term trades.
• Knowing these basics helps CFD traders manage costs and timing more confidently.

If you’ve ever wondered why the price of oil today isn’t the same as the price a few months from now, you’ve already brushed up against two of the most essential ideas in the futures market: Contango and Backwardation.

They sound complicated, but the concept is simple: the market values time.

A barrel of oil today isn’t worth quite the same as a barrel next June, and that difference tells you a lot about what traders expect from the economy, demand, and supply in the months ahead.

When futures prices sit above today’s price, that’s called contango.

When they sit below, that’s backwardation.

One point to plenty of supply and steady demand.

The other signals scarcity, urgency, or even a touch of panic.

Understanding these two curves helps you read what’s happening beneath the surface of commodity markets, whether you’re trading oil, gold, or natural gas CFDs.

Understanding Futures Curves: Spot vs Futures Price

Every futures contract is a bet on what something will cost later.

The spot price is what you’d pay today. The futures price is what buyers and sellers agree it’ll cost at a specific date in the future.

When you connect all those futures prices across different months, you get a futures curve: a line that shows how the market values time.

• If the curve tilts upward, future prices are higher than spot.
• If it tilts downward, future prices are lower.

It’s like looking at a weather forecast for prices. A snapshot of expectations built from thousands of individual trades.

What Is Contango?

In contango, futures prices sit above the current spot price.

It’s the market’s way of pricing the cost of carry.

Everything that comes with holding a physical commodity for later delivery.

Think of oil in storage tanks or copper sitting in warehouses.

Holding it costs money: storage fees, insurance, financing, and even the interest you could’ve earned somewhere else.

Add all that up, and it makes sense that future contracts cost a bit more.

Why it Happens

• High storage or financing costs
• Low immediate demand
• Abundant supply
• Rising interest rates or inflation expectations

Contago Example

Oil is the textbook case.

When inventories are complete and refineries are relaxed, oil prices rise. The same goes for metals like copper or aluminium.

When production is steady and demand is soft, the market stays in contango.

In 2020, during the pandemic slump, oil demand dropped while storage filled up.

Futures prices for later delivery soared above spot, creating one of the steepest contango curves ever seen.

What Is Backwardation?

Backwardation is the opposite. Futures prices fall below today’s spot price.

That usually means buyers are willing to pay more to get the commodity right now rather than wait.

Why it Happens 

• Supply shortages or production disruptions
• Strong current demand
• Low inventories or limited storage
• A high convenience yield (the value of having the physical commodity available immediately)

Backwardation often shows up in perishable or seasonal commodities.

Agricultural markets like wheat or coffee can flip into backwardation if bad weather damages crops.

In energy, it happens when demand spikes or refineries run short of supply.

Backwardation Example

Crude oil swung into backwardation in 2022 as supply disruptions and strong post-pandemic demand pushed near-term prices several dollars above later contracts.

Contango vs Backwardation at a Glance

Feature	Contango	Backwardation
Futures vs Spot	Futures > Spot	Futures < Spot
Market Signal	Ample supply, low urgency	Tight supply, strong demand
Common Causes	Storage and financing costs	Scarcity, production issues
Typical Commodities	Oil, metals, gold	Energy, grains, perishable goods
Roll Yield Effect	Negative for longs	Positive for longs
Trader Implication	Costly to hold long positions	Favors short-term longs
Market Mood	Calm, well-supplied	Pressured, urgent

Key Drivers of Market Structure Shifts

Markets rarely stay in one state for long. Curves twist and reshape as conditions change.

A few significant forces drive those shifts:

• Supply and demand. When there’s plenty of a commodity, contango appears. When supply tightens, backwardation takes over.
• Interest rates and inflation. Higher rates raise financing costs, steepening contango. Falling rates or easing inflation can flatten the curve.
• Storage availability. Limited storage pushes markets toward backwardation because holding physical supply becomes harder.
• Seasonal patterns. Gasoline tightens in summer; natural gas tightens in winter. Those cycles cause predictable swings between the two states.

Implications for Futures Traders

For active traders, the shape of the curve directly affects returns.

Roll Yield and Contract Rollover

When a futures contract nears expiry, traders either close it or roll it into the next month. The price difference between the two creates a roll yield, a significant performance factor.

• In contango, rolling costs money. You sell the old contract at a low price and buy the new one at a higher price. A negative roll yield.
  
• In backwardation, the opposite happens. You sell high, buy low, and earn a positive roll yield.

Over time, these slight differences can add up.

There’s one reason two traders with the same idea can see very different results depending on how long they hold.

Managing Risk

Understanding curve shape also helps with timing.

• In deep contango, long-term positions can bleed value as contracts roll forward.
• In backwardation, long positions may benefit from the positive roll yield but face sharper price swings.

Either way, knowing where the curve sits gives traders context before committing capital.

Impact on ETFs and Passive Futures Investing

Contango and backwardation don’t just affect active traders but also influence the performance of commodity ETFs.

Funds that roll futures each month face the same roll yield effect.

In prolonged contango, that drag can slowly erode returns.

It’s why some oil ETFs lag behind headline price gains: they keep buying more expensive contracts.

In backwardated markets, ETFs can benefit. Rolling into cheaper contracts adds incremental gains over time.

The takeaway? Even for passive investors, the curve is essential.

It shapes how closely an ETF tracks the commodity it represents.

Arbitrage Opportunities

Whenever prices drift too far apart, arbitrageurs step in.

They’re the traders who buy in one market and sell in another to lock in small, almost risk-free profits.

If a futures contract trades too high relative to spot, they can buy the commodity now, store it, and sell the futures, bringing prices back into alignment.

If futures trade too low, they trade in the opposite direction.

This process is what keeps futures and spot markets in sync.

It’s not perfect, but it’s a key reason prices eventually converge as contracts near expiry.

Arbitrage also plays a significant role in maintaining market efficiency.

Without it, futures prices could wander far from reality.

Instead, competition between traders constantly forces alignment.

Historical Case Studies and Real-World Examples

Oil Market in 2020

When global demand collapsed and storage tanks overflowed, oil futures went into extreme contango.

On 20 April 2020, the WTI front-month even flipped negative as limited available storage and thin liquidity forced traders to unwind into expiry.

This showed how physical constraints can dominate pricing. (U.S. Energy Information Administration)

Agricultural Markets

During drought years, crops like corn and soybeans often enter backwardation.

After the 2012 U.S. drought, the Corn Belt saw an “inverted” structure in which spot cash prices for corn and soybeans traded above nearby futures, as buyers paid up for immediate supply. (farmdoc daily)

Precious Metals

Gold and silver rarely see backwardation, but when they do (usually during financial stress), it signals investors are willing to pay extra for immediate access rather than wait for delivery.

Practical Takeaways

1. Check the curve shape before trading. A quick look at how futures are priced over time gives instant context.
   
2. Watch for roll yield. If you’re holding CFDs for more than a few days, curve structure can affect returns.
   
3. Follow storage and supply data. Reports from agencies like the EIA often explain why a market is in contango or backwardation.
   
4. Use demo accounts to test strategies. PU Prime’s demo environment lets you explore how different curve shapes impact trades before risking real capital.
   
5. Stay alert for flips. When a curve shifts direction, it often signals a significant change in sentiment or supply. Those moments create both risk and opportunity.

The Bottom Line 

Contango and backwardation might sound technical, but once you see them on a chart, they make intuitive sense.

For traders, they’re part of the rhythm of the futures market.

Learning to read that rhythm helps you understand what’s really driving price moves and how to position yourself accordingly.

If you want to see these dynamics play out in real time, try PU Prime for yourself.

PU Prime gives you access to live market data, price charts, and analysis tools that make it easier to track curve movements as they happen.

Start exploring different trading accounts with PU Prime today. 

FAQs

What’s the simplest way to remember contango vs backwardation?

Contango means futures prices are higher than today’s spot price, usually due to storage or financing costs.

Backwardation is the opposite: futures are cheaper because demand for immediate delivery is strong.

Do these patterns predict price direction?

Not directly. Contango and backwardation show how the market is pricing time, not necessarily where prices are headed.

They’re more about sentiment and supply-demand balance than forecasts.

Why do oil and gas markets switch between the two so often?

Energy markets react quickly to changes in supply, storage, and demand.

A mild winter or production surge can create contango, while a cold snap or refinery outage can flip it into backwardation.

How does this affect CFD trading?

Since CFDs mirror futures prices, the curve shape affects holding costs and roll yield.

In contango, rolling forward can reduce returns; in backwardation, it can boost them.

How can I see if a market’s in contango or backwardation right now?

Most trading platforms, including PU Prime, show real-time price charts across contract months.

An upward slope means contango; a downward one means backwardation.