The document explains the concepts of contango and backwardation in commodity markets, particularly in crude oil. Contango occurs when future prices are higher than current spot prices, while backwardation is the situation where future prices are lower than current spot prices. The article aims to simplify these concepts for better understanding and practical application.

1. Tired by searching
meaning of
contango and
backwardation
over the internet?

2. Confused in understanding concept of
contango and backwardation by
referring innumerable websites over the
web?
But the question still remains, How
to understand contango and
backwardation in simple language

3. Don’t worry!
This presentation gives you a gist
of contango and backwardation

4. Lifesaving Concepts
Commodity
Market
Future
contract
Commodity
Future
price
Premium
Spot
Price
Derivative

5. In certain energy and commodity markets contango and
backwardation terms are used. If we get more into deep
into it; we can say that especially in the crude oil market
these terms are used. In many books you can see only
theoretical definitions but in practical that concept is
much different.
There are two concepts of contengo•
•
Contengo
Normal Contengo

6. Contango refers to the situation
where the Future prices of
stock are higher than the
current spot price.

7. It refers to phenomena where
Future price is higher than
expected Future spot price
(Expected market Price) in the
market.

8. If you understand contengo by heart then you can easily predict
the meaning of backwardation. Simply it is opposite to contengo.
Backwardation can occur if the markets have oversupply of
commodities. Backwardation is bearish indicator it also indicate an
immediate shortage.
There are two concepts of backwardation
•
•
Backwardation
Normal Backwardation

9. Backwardation Definition
It refers to the market situation
where the Future prices are lower
than the current spot prices for a
particular commodity.

10. Normal Backwardation
It refers to phenomena where
Future price is less than expected
future spot price (Expected market
Price) in the market.

11. Difference between Contango and Backwardation
Basis
Definition
Contango
Contango refers to the situation
where the Future prices of stock
are higher than the current spot
price
Future Curve
Price Difference
Most Happen in
Case of
Upward Sloping
Future Price > Spot Price
Commodity
Backwardation
It refers to the market
situation where the
Future prices are lower
than the current spot
prices for a particular
commodity.
Downward Sloping
Future Price < Spot Price
Oil

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