What does Contango mean?
A pricing situation in the futures market in which the futures price of a commodity is trading above the spot price or in other words, the spot price is below the futures price. In contango, near month futures are cheaper than those expiring further into the future.
For example, on May 18th, the crude oil spot price was $59.23 a barrel, the near month future June 2015 was at $59.70, Sept 2015 was trading at $61.19, and Dec 2015 at $62.17.
Futures Knowledge Explains Contango
Markets that are in contango, where the spot price is lower than the futures, generally happens when there is a cost to carry the commodity so buyers will pay more than the spot to avoid these additional costs.
Contango is opposite of backwardation. In a contango situation forward prices exceed spot prices, so the forward curve is upward sloping. In backwardation, the futures prices are lower than the spot price and so the forward curve slopes downward. Contango and backwardation are terms generally used in oil and commodity markets to describe the shape of the forward curve.