Every futures market trades several contract months at once, and each has its own price. When you line them up from the nearest to the furthest, the prices form a curve. Whether that curve slopes up or down has a name – contango or backwardation – and it matters to anyone who holds a position for more than a few days, because rolling into the next month then costs or earns money. This guide explains the two shapes in plain terms, why they appear and what they do to a long-term position.
The curve in one sentence
The futures curve (also called the term structure) is the list of prices for the same product in different expiry months. For crude oil it could be the price for the next month, the month after that, and so on.
- Contango: later months cost more than nearer months. The curve slopes upward.
- Backwardation: later months cost less than nearer months. The curve slopes downward.
The two terms describe the shape of the curve at a point in time, not a forecast. A market can move from one to the other, and different parts of the same curve can even point in different directions.
Why contango appears
For a product that can be stored, the futures price tends to sit above the spot price by up to the cost of holding the physical product until the future date: financing, storage and insurance. This is often called the cost of carry. The full cost of carry is a ceiling for contango; the curve usually sits below it, while backwardation has no such limit. Contango is the normal picture for markets with plentiful supply, such as gold, where storage is cheap and the curve is usually in contango. It is not a sign that the market expects higher prices; it is arithmetic about the cost of waiting.
The same logic holds for financial futures. Stock index futures trade above or below the cash index depending on interest rates and dividends; currency futures depend on the interest-rate difference between the two currencies. In both cases the gap is a carry calculation, not a view on direction.
Why backwardation appears
When a commodity is scarce right now, buyers who need it immediately pay a premium for the nearest contract, and the curve slopes down. The premium for having the product now is sometimes called the convenience yield. Typical triggers are a supply disruption, a cold snap that lifts demand for heating fuel, or low inventories ahead of a harvest. Energy and agricultural markets move between contango and backwardation as inventories rise and fall.
What it does to a position you hold: roll yield
A futures contract expires, so a trader who wants to keep an exposure rolls from the expiring month to the next one (see roll dates). When you roll, the two months have different prices. The roll itself is neutral, but the new contract starts at a different level and converges toward spot over its life:
- In contango, a long position rolls into a higher-priced month. If the spot price does not change, the old contract would converge down toward spot while the new one starts higher. Over many rolls the position loses this difference, the so-called negative roll yield. It is why a fund that rolls long crude oil futures month after month can underperform the spot price in a long contango.
- In backwardation, a long position rolls into a lower-priced month and tends to gain the difference, a positive roll yield. A short position gets the reverse in each case.
The roll itself creates no gain or loss at the instant you do it: you close the old month at its price and open the new one at its price. The effect shows up over time, because each contract's price converges toward the spot price as it nears expiry. For a short-term trader the effect is small; for someone who rolls a position for months it can be the largest cost or the largest return.
A simple example without prices
Imagine a market in contango: each month is priced a little above the one before, and the nearest contract is close to the spot price. You hold the next month through a period in which the market goes sideways. As it becomes the nearest contract, its price drifts down toward spot. When you roll, you again buy a month priced above spot, which will drift down in turn. Do that every month and the small differences add up. The reverse in backwardation: the next month is cheaper, and a sideways market lets the position drift up.
The size of the effect is the price gap between the two months relative to the price, repeated at every roll. You can see the gap at any time by comparing two months on your platform; this site does not publish futures prices, so check the current curve there.
Reading the shape in practice
- Look at the curve before you hold long. If you plan to carry a position for weeks, compare the front month with the next one. A steep contango is a cost of holding; a steep backwardation is a tailwind for longs and a headwind for shorts.
- Calendar spreads trade the difference between two months directly: the trader buys one month and sells another. They are used to express a view on the curve itself or to roll a position as a single order.
- Expect the shape to change. A market in backwardation after a supply shock can flip to contango once supply recovers. Do not extrapolate today's shape.
- Do not confuse the curve with the market's view of future prices. A contango curve is not a forecast that prices will rise, and backwardation is not a forecast that they will fall. Contracts converge to the spot price at expiry in either case.
This guide is general information. It does not describe a specific market's current curve and is not a recommendation. Futures trading carries a high risk of loss.
Educational content only – not investment advice. Futures trading involves substantial risk of loss.