Is there still oil in contango?

It remains in contango, with the spread at minus $9 a tonne. Despite the current weakness, the spread is still far above the level of minus $92 a tonne in April 2020, when many countries entered a first round of lockdowns, and oil sellers struggled to find buyers with storage tanks brimming full.

How do you profit from contango oil?

Another way for traders to profit off a contango market is to place a spread trade. Going back to the example, say a trader believes that the spot price of oil will go even lower versus the future month’s contract. A trader would short the spot month contract and buy the further out month.

What is contango in the oil market?

Contango is a situation where the futures price of a commodity is higher than the spot price. In all futures market scenarios, the futures prices will usually converge toward the spot prices as the contracts approach expiration. Advanced traders can use arbitrage and other strategies to profit from contango.

Is oil normally in contango or backwardation?

‘ That’s a Positive Sign. Oil prices have been trading in a pattern known as contango this year, where spot prices and near-term futures are worth less than futures expiring several months from now.

Why is oil market in backwardation?

The primary cause of backwardation in the commodities’ futures market is a shortage of the commodity in the spot market. Manipulation of supply is common in the crude oil market. For example, some countries attempt to keep oil prices at high levels to boost their revenues.

Why is gold always in contango?

Generally speaking, contango is a normal situation for durable and easily storable commodities which have a cost of carry, such as gold. This is due to the carry costs – higher futures price is a way of paying for these costs. Indeed, gold spends most of the time in contango.

Why is contango bad?

In the jargon, contango is when the futures curve slopes upwards. Contango is a problem because if you keep rolling your futures contracts in a contango market, it will whittle away any potential returns. Worse, a long contango market can undermine all the gains made from rising spot prices.

What is normal contango?

The relationship between the futures price of an asset being greater than the expected spot price of the asset on the delivery date of the contract.

Why is oil usually in backwardation?

Is oil market in backwardation?

As a result, the prices of futures contracts for the end of the year remain relatively unchanged, at $90 per barrel. The oil markets would be in backwardation.

What does it mean when oil is in contango?

After remaining at or near backwardation for much of the year, the oil market has returned to contango–a situation that could punch big holes in any gains by oil futures traders. Contango and backwardation are terms commonly used in commodity futures markets.

How can traders take advantage of the contango market?

Traders with access to physical oil and storage can make substantial profits in a contango market. Other traders may seek to profit on a storage shortage by placing a spread trade betting on the contango structure of the market to increase. Contango means that the spot price of oil is lower than future contracts for oil.

How much does it cost to invest in contango oil?

To understand the serious ramifications that contango can have on your portfolio, consider that the United States Oil ETF (NYSEARCA:USO), one of the most popular energy ETFs that rolls its contracts every month, pays high premiums on oil futures contracts (contango) that can cost investors anywhere from 10-80% per year.

How to avoid the negative effects of contango?

The most obvious solution to skirt the negative effects of contango is by constantly monitoring the futures curve and only investing in the market when it’s in backwardation. When the curve is sloping upwards, trading futures contracts will erode your capital especially if you do it frequently.