Contango

A futures contract is an agreement to buy or sell an asset – such as oil, gold, currency, cryptocurrency or shares – at a prearranged price on a prearranged date (the “delivery date”). Futures may be physically delivered (which means the seller must deliver the asset to the buyer), or cash settled (which means they exchange a payment based on the difference between the initial price and the price when the contract expires).

Futures contracts for any asset are usually available with a range of delivery dates – this may be monthly, quarterly, or less regular (for example, some delivery dates for crops may be aligned with harvest months).

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But the relationship between different months isn’t constant. If there is a sudden shortage of supply, prices for immediate delivery (known as spot prices) and for the futures contract with the next delivery date (known as the “near month” or “front month”) might shoot up. Conversely, a short-term supply glut might cause spot and front-month prices to fall below prices for delivery in later months (“back months” or “far months”).