Monday, January 5, 2009

Contango, Backwardation, Oh My

Lots of commentators in talking about the oil market are throwing around the word contango like it's a shiny new toy.

From Wikipedia, the free encyclopedia

Contango is a term used in the
futures market to describe an upward sloping forward curve (as in the normal yield curve). Formally, it is the situation where, and the amount by which, the price of a commodity for future delivery is higher than the spot price, or a far future delivery price higher than a nearer future delivery.
The opposite market condition to contango is known as
A contango is normal for a non-perishable commodity which has a cost of carry. Such costs include warehousing fees and interest forgone on money tied up.

It's normal. It's even more normal, or the slope of the curve should be more pronounced, if current demand for the commodity is below long-term trend and supply has not been sufficiently curtailed. In an economy as weak as this one, that is obviously the case. OPEC has struggled to cut supply but can't get ahead.

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