Contango
Contango describes a price situation in commodity futures . With Contango, the price for delivery in the future ( forward rate ) is higher than the current spot rate . In this situation, the so-called futures curve is typically directed upwards, i.e. i.e. the later the delivery date, the higher the price. Contango regularly leads to rollover losses for speculators .
The reasons for a contango situation can be complex:
- Storage costs - i.e. the total costs of storing a commodity, from storage fees and insurance costs to interest and shrinkage - are an important reason why commodity futures with a delivery date in the future are often traded at a higher price than they are now. In the medium term, storage costs usually define the maximum strength of the contango effect. Because with stronger contango, which can no longer be explained by higher storage costs, sooner or later arbitrageurs appear in a free market who buy up goods at a favorable spot market price and at the same time offer them for sale as a futures contract for delivery in the future , whereby the difference covers at least your own storage costs. When the oil price has fallen sharply, for example, one can regularly observe the phenomenon that hedge funds rent oil tankers in order to carry out arbitrage transactions.
- In addition, however, a demand for a later delivery on the part of the buyer is also necessary so that there is any need for storage. This demand usually arises from the fact that buyers expect a rising raw material price on the spot market in the future, or at least fear this, and therefore want to "hedge" themselves through futures contracts and are therefore also willing to pay a higher price for them. If, on the other hand, buyers - for whatever reason - firmly assumed that they would be able to buy cheaply on the spot market in the future, they would have no reason to pay surcharges for storage and delivery in the future, so that a corresponding demand would disappear and the contango situation could weaken or even turn into the opposite, to backwardation .
- A sudden drop in demand or an increased supply on the spot market can surprise buyers, sellers and arbitrageurs. Since they may or may not be able to change their plans at short notice, the spot price then drops and contango automatically arises.
The opposite of contango is backwardation .