Contango vs Backwardation: Reading the Futures Curve

By VoxTradePro Editorial Team · Published 2026-11-01 · Updated 2026-11-08 · 11 min read

Look at a futures market and you will see not one price but many: one for each delivery month. Lined up from the nearest month to the furthest, those prices form the futures curve. Its shape carries a lot of information. When later months are more expensive than nearby ones, the market is in contango. When nearby months are more expensive, it is in backwardation. This guide explains why curves take these shapes, how they affect anyone holding a futures position or a commodity fund, and how traders read the curve to understand supply and demand.

The futures curve in one minute

A futures contract is an agreement to buy or sell a set amount of a commodity at a fixed price on a future date. Exchanges list contracts for many months ahead. Each month has its own price, set by supply and demand for delivery at that time. If you plot those prices with the delivery dates along the bottom, you get the curve. If you are new to futures, start with our guide to futures, spot and CFDs.

Why curves slope upwards: the cost of carry

Imagine you own a barrel of oil today and could sell it now or in six months. If you wait, you must pay to store and insure it, and you lose the interest you could have earned on the cash from selling it now. A buyer for six months ahead should therefore pay roughly today's price plus those carrying costs. This is the cost of carry, and it is why a well-supplied market naturally sits in contango.

The cost of carry also sets a rough limit on how steep contango can become. If later months were much higher than spot plus storage and financing, traders could buy the physical commodity now, store it and sell futures, locking in a profit. That trade, called cash-and-carry, pulls the curve back into line. It only breaks down when storage itself runs out, which is what happened in crude oil in April 2020, when storage at the US delivery hub was nearly full and the expiring WTI contract briefly traded below zero.

Gold is the textbook carry market. It is cheap to store relative to its value and there are huge above-ground stocks, so gold futures almost always trade in contango, roughly in line with interest rates. When gold's curve flattens or inverts, it is a rare sign of unusual demand for physical metal.

Why curves slope downwards: convenience yield

If carrying costs always applied, every curve would be in contango. Backwardation happens because holding the physical commodity sometimes has a benefit that outweighs those costs. A refinery that runs out of crude must stop production; a food processor without wheat cannot fill orders. When supply is scarce, having the commodity now is valuable. Economists call this the convenience yield. When it is high, buyers pay a premium for prompt delivery, nearby prices rise above deferred ones and the curve inverts.

Backwardation is common in energy markets during supply disruptions, in agricultural markets before a new harvest when old-crop stocks are low, and in base metals when exchange warehouses are drained. It is a signal that the market wants the commodity out of storage and into use.

Spot, front month and the spread

Traders rarely look at the whole curve at once. Instead they watch spreads: the price difference between two months. For example, the gap between the first and second Brent contracts, or between the first and the twelfth, is a quick measure of tightness. A spread moving deeper into backwardation suggests the physical market is tightening, often before it shows up in inventory data. In base metals on the LME, the key spread is between the cash price and the three-month price, which is why metals traders talk about "cash-to-threes".

Spreads move for reasons beyond pure supply. Seasonal markets such as natural gas have curves with built-in humps: winter months trade above summer months because demand for heating peaks then. A gas curve can show contango into winter and backwardation into the following spring at the same time. Grain curves have similar steps between old-crop and new-crop months.

Roll yield: why the curve matters to investors

If you hold a futures position for longer than one contract lasts, you must roll it: close the expiring contract and open the next one. The curve decides whether that costs or earns you money.

Contango example (illustrative): you hold the front-month contract at 70 and the next month trades at 71. At roll time you sell at 70 and buy at 71. If prices then stay unchanged across the curve, the next month gradually "rolls down" towards the spot price as it approaches expiry. Over a year of monthly rolls, a steady contango of one point per month could cost around 12 points, even if spot never moves.

Backwardation example: the front month trades at 70 and the next at 69. You sell at 70 and buy at 69. If the curve stays the same, the cheaper contract tends to rise towards spot as it approaches delivery, giving you a positive roll yield.

This is why commodity funds and ETFs that hold futures can perform very differently from the spot price you see on a chart. In long periods of contango, a fund that keeps buying the next month can lag spot significantly. Some products try to reduce the drag by holding contracts further out on the curve or spreading their holdings across months. Before buying any commodity fund, read how it rolls and check the curve of the market it tracks.

Examples across markets

Crude oil

Oil swings between the two states more than most markets. During periods of strong demand and supply cuts by producer groups, the WTI and Brent curves have often been in steep backwardation. During demand shocks, such as 2020, they moved into deep contango as storage filled up and traders paid to hold oil on tankers at sea. Watching the shape of the curve alongside weekly inventory reports gives a clear read on the balance.

Gold and silver

Precious metals are almost always in mild contango because of large stocks and low storage costs, with the slope closely tracking interest rates. A sudden flattening or inversion in gold or silver is unusual and usually points to scarce metal in a particular location.

Agriculture and livestock

Grain curves reflect the crop calendar. Before harvest, old-crop months can trade above new-crop months if stocks are low. Livestock contracts such as lean hogs have strong seasonal shapes, because supply and demand vary through the year and live animals cannot be stored indefinitely like metal.

Crypto futures

Bitcoin futures with fixed expiry dates usually trade in contango, with the premium (called the basis) reflecting demand for leverage and the cost of capital. Traders can buy spot Bitcoin and sell futures to earn that basis, a crypto version of cash-and-carry. A large basis often signals heavy speculative demand; a basis near zero or negative suggests fear. Perpetual futures have no expiry, so instead of a curve they use periodic funding payments that serve a similar purpose.

How traders use the curve

• As a sentiment and supply gauge. A curve moving from contango to backwardation often confirms a bullish story told by the outright price. If the price rises while the curve stays in deep contango, the rally may be driven more by speculation than physical tightness.
• To choose which contract to trade. Traders expressing a long-term view may prefer a contract further along the curve to reduce roll costs or avoid seasonal effects.
• To trade spreads. Buying one month and selling another isolates the shape of the curve from the outright price level. Spread trades can have lower risk than outright positions, though they still move sharply in squeezes.
• To understand their chart. Continuous futures charts splice contracts together. In strong contango or backwardation, the switch from one contract to the next can create jumps that are not real price moves. Many charting platforms offer back-adjusted series to correct for this.

Common misunderstandings

• "Contango means prices will rise." No. A futures price is not a forecast in the simple sense; contango mostly reflects carrying costs. The front month does not have to climb to meet later months, and it often happens the other way round.
• "Backwardation is always bullish." It shows tightness now, but high prices can also attract new supply and reduce demand, eventually loosening the market.
• "My fund should match the spot price." Futures-based funds earn or lose roll yield, so their returns can differ markedly from spot over months and years.

Frequently asked questions

What is the difference between contango and backwardation?

In contango, contracts for later delivery are priced higher than nearby ones. In backwardation, nearby contracts are priced higher than later ones.

Is contango good or bad?

Neither; it is a market condition. It is costly for investors who hold long futures positions and roll them, but it benefits those who store the commodity and sell it forward.

Why was oil below zero in 2020?

Extreme contango and nearly full storage at the delivery point meant holders of the expiring contract had nowhere to put physical oil, so they paid others to take the contracts off their hands.

Does crypto have contango?

Yes. Dated Bitcoin and Ether futures usually trade above spot, a premium known as the basis, which reflects leverage demand and interest rates.

See the live energy market charts and our commodity price pages to watch these structures in real time.

Educational content only, not financial advice. See our disclaimer.

Next guide: Gold-to-Silver Ratio Explained: How to Read and Use It