Contango and backwardation

Futures contracts on the same commodity or index trade at different prices for different delivery months. The shape of those prices has names:

• Contango: later contracts are priced above nearer ones (and above the spot price). This is common when storage, insurance and financing make it costly to hold the commodity.
• Backwardation: later contracts are priced below nearer ones. This often appears when there is strong demand for immediate delivery.

Why CFD traders meet it

Many CFDs on oil, natural gas and some other commodities are priced from a futures contract rather than a spot market. When that contract nears expiry, the provider rolls the CFD into the next month. Providers handle the roll differently: some close and reopen positions, some make a cash adjustment so that the price gap does not appear as profit or loss, and some charge a spread for rolling. Check how yours does it.

Example

Illustrative figures: the front-month crude oil contract is at $70.00 and the next month is at $71.00, so the market is in contango.

• A long CFD position rolled from $70 to $71 is now priced off a contract $1 higher. If the provider adjusts your account so the roll is neutral at that moment, the effect shows up afterwards: as the $71 contract approaches expiry, it tends to converge towards the spot price.
• If spot stays at $70 for the whole period, a holder who keeps rolling long positions in persistent contango tends to fall behind the spot price over time.
• In backwardation, the effect runs the other way for long positions.

Practical note

This is why charts of a commodity CFD, a spot price and an exchange-traded product on the "same" commodity can diverge over months. The same mechanics affect products linked to the VIX. Our guides to how commodity futures work and oil trading explain the futures curve in more depth.