![]() ![]() In the traditional theory of futures prices, the cost of owning and storing a commodity (cost of capital plus cost of storage) tends to ensure future prices trade above spot prices.īut producers, consumers and traders will pay to avoid the risk of being without adequate supplies on hand, which can impart a premium to spot prices if stocks are short. Given the intimate relationship between supply, demand, inventories and forward prices, the shape of the futures price curve is closely monitored by professional traders.Ĭontango and backwardation are avidly watched in trading rooms because shifts can send important signals about the balance between supply and demand and changes in the level of stocks. In a market with tight inventories, the reverse tends to be true, with price for immediate delivery trading above future prices, a condition known as backwardation.īy extension, in a market characterized by excess supply, inventories will be rising, so the market will tend to move from backwardation into contango, or if it is already in contango into a deeper one.Ĭonversely, in a market characterized by excess demand, inventories will be falling, so the market will tend to move from contango into backwardation, or a deeper backwardation. In a market with ample inventories, the price of a commodity for future delivery tends to be above the price for immediate delivery, a condition known as contango. Holbrook Working of Stanford University’s Food Research Institute explained the relationship between stocks and the futures price curve over 80 years go (“Price relations between July and September wheat futures” 1933). A ship passes a petro-industrial complex in Kawasaki near Tokyo December 18, 2014.
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