What are 'contango' and 'backwardation'? - MoneyWeek Investment Tutorials

[@novoid69]

This has been a pleasure to watch and easy to understand. Thank you, good sir.

[@MikeNewland]

Very clear explanation. The future price is related to the CURRENT spot price by the costs of carry. But the wikipedia entry on contango says that the future price is related to the expected FUTURE spot price. All at sea moi.

[@sophiemarissa]

Please keep up this great work! it is helping me with my studies!

[@apurvatrue]

Awesome explanation. I was really confused as to why the prices in futures are higher or lower as compared to spot market. Now I understood that the cost of carry, storage costs etc come into picture and you explained it well. Thank you:)

[@mikemccartneyable]

Perfectly explained, thank you

[@alexandermorales20]

This was beyond helpful - thank you!!

[@nahsirah]

I am confused now, I think you may be incorrect, the normal state of the market is backwardation, although that sounds counter-intuitive, backwardation and contango are not referring to the futures price (which was in your intro), both those scenarios relate to price of spot in the future (forecast) . Therefore contango is when the forecasted future spot price is higher than than current spot, this is a bearish indicator as it forces oil into inventory

[@JaxVideos]

If you try to measure 'expectations' independent of actual futures prices, you will always be confused. The Austrian approach is to examine how each arbitrage incentivizes some actor. Warehouses exist because the spot ask typically falls below the near future bid. The warehouseman covers his costs and earns a profit from selling the future and buying at spot. We have a market in storage thanks to the ordinary contango that prevails in most commodities most of the time. Backwardation is the response to scarcity: when the spot bid rises above a nearby future's asking price, the marginal user of the commodity sells his inventory at spot and replaces it with the (cheaper) future delivery. He forgoes his present use in favor of other higher uses in the present scarcity, and is compensated to do so.

[@MoneyWeekVideos]

nahsirah - backwardation is less common in the history of futures markets (hence the term), However in today's liquidity - infused, fear-driven markets you get more short term backwardations than you used to. Costs of carry will always make contango (future above spot) the norm in pure maths terms. Other factors then determine whether a contango relationship holds or not. So in summary I think I am right!

[@epcortek11]

It's too bad he's not making videos anymore....He lays down explanations so well.

[@parthparekh1]

Am assuming that this is what happened last year when oil prices went negative ! 😅

[@NicosMind]

Awesome work. And your site looks good too. I was expecting some cheap thing but hell no! Its a proper site with loads on it. Well done. Gonna have a wee nosey here. Im a fan of Austrian economics, have even read a few books, so im interested in all this stuff. But theres still loads for me to learn. Keep up the good work with these vids, Theyre great for learning the basics/fundmentals

[@quinnhk]

There are two ways of talking about these concepts. Check out the Khan Academy video on the subject, he does a nice job of differentiating and you'll see the two graphs that you're familiar with and possibly finding confusing.

[@DDeathdealer007]

Hi Tim Would there be any chance of a video covering the Fisher Separation and where that fits into investment decisions? I have only seen it in theory and would like to know more about how it effects investment decisions in different markets and if all stakeholders understand it in the real world. Cheers Nick

[@vaibhav1131]

please share role of long.short hedgers in contango/bakwardation

[@macabrew]

How do you find out if you're in a contango market of a futures?

[@jz5748]

Wth is contango? I need to learn.thnx to this man

[@prula]

Temporary the contango of oil is extreme. Does that imply that we all should be buying oil long positions now?

[@falakoala4579]

The opposite from what I have heard. Check out macro voices latest podcast. It is what brought me here, trying to figure out contango risk and how it works

[@prula]

@@falakoala4579 Thank you! I'm just listening in! To be honest, I don't really understand it! ^^ I bought some long WTI Certificate.. do I have carrying costs? Thank you!

[@kayrealist9793]

@@prula You should be fine if you bought far out the curve. It will take time to work off the supply that is still being built up.

[@prula]

Actually I decided today to step back and get back on once the market has resolved its current status. If there is nearly no demand, the price of oil can go negative as we have seen today with the may contracts. It's a wired but interesting world..

[@falakoala4579]

@@prula yup. Be carful! Dangerous atm. I'm studying and watching. Probably a lot of deflation coming so you don't want to blow up your cash with one bad trade you didn't fully understand

[@Mr4thetruth]

Thanks, very good simple explanation :)

[@lexazver]

Do you get this in Sovereigns Futures markets like French OAT or US-Treasuries and if yes which one and why?

[@adijo123]

Ok so if I understand correctly, in a hypothetical markets which consists of Laptop futures, the Laptop would be an example of backwardation right? Since if I were offered a laptop six months in the future, I would pay less for it today since the same laptop would cost me lesser in the future?

[@georges8819]

Nice and simple explanation, thank you sir!

[@JaxVideos]

The classic reason for temporary backwardation is found in cyclical commodities. Near harvest time, granaries (warehouses) are emptied, and the comodity supply is scarce--or already under contract--spot priceis inflexible and high, yet a well-measured harvest is incoming; patience for there will soon be a glut. The classical reason for permanent backwardation is loss of trust in futures contract counterparties; the future delivery must be discounted for the risk it may never occur.

[@raccoon874]

*Contango has its origins in the slums of Buenos Aires*

[@smitaasoni]

Thank You for explaining concept in a simple and logical form

[@thearadanamcharoen1983]

Great video and very clear explanation! Thank you so much.

[@ExcelTutorials1]

Thanks for the tutorial!!!

[@marinabaskakova2333]

Thank you, so clearly explained!

[@charlottemarceau8062]

Would the example of over oil production and running out of storage causing futures prices to fall to negative values be an example of backwardation?

[@JaxVideos]

No. Backwardation signals scarcity of the underlying commodity. The oil futures whose prices went negative were expiring into a scarcity of storage tanks. At the same time (March 2020) spot oil was also negatively priced because the storage costs had soared. So that temporary glut was very steep contango in oil and deep backwardation in storage tanks. The future prices fell noticeably because time pulls them closer to NOW.

[@MikeNewland]

What I can't figure is this. On the basis of the video the futures price can be the spot price plus carry costs or lower (backwardation). But can it be higher? You often hear people saying 'futures prices have rocketed' which implies to me above the spot plus costs of carry.

[@zhubella7481]

I wonder how the investor can find if this commodity is backwadation or contango? should we compare the spot price and future settlement price which can be found in bloomberg? or contango is just predicted by investor?

[@Unboxingandreviews2021]

Hi, thanks for your explanation of contango and backwardation for commodities. My question is: does the same phenomenon apply to a stock index future, such as the SP 500 future and Dow Jones Industrial future? I.e. is the normal situation for SP 500 future and Dow Joes Industrial future contango??

[@Luis.SanSebastian.Gallejones]

Perfectly explained! Very clear :)

[@zhaofengzheng2923]

You are a legend, sir. Thank you.

[@maikitol1111]

Excelent explanation!

[@CikRaoSharmizabtAbdRahman]

oneQ, is there possibility that the graph is horizontal, meaning the price is constant (no change) for a period of time?

[@JaxVideos]

As a permanent condition, zero or negative interest rate policies flatten the basis curve of money stored in electronic form at reputible depositaries.

[@ukaszgach4318]

I finally understood, thank you :)

[@adamhostetter7465]

Incredible video -- thank you!

[@Pfsif]

Explained very well!

[@sromondas]

Thanks. Very helpful.

[@CHOI8482]

Thank you for making me better understood!!!

[@MartinJG100]

A great shame that Tim decided to go back to Civvy Street and called it a day on these vids. He had a great combination of a sharp mind and a light touch.

[@DoctorMotorcycle]

Why do English accents make people sound smarter?

[@farhanurmiah2635]

thanks

[@12caredee21]

Thank you very much!

[@jensrombouts]

Thank you!

[@zoeyyyyh]

this is so good

[@Jamaicanone]

Thanks a lot

[@alaataktokani8884]

Wonderful

[@SzTz100]

Brilliant, than you

[@randdemerson]

Excellent! Thank you old bloke.

[@benbooker9114]

5:15

[@br-xq1yz]

united states oil!? USO stock

[@tonysoprano1454]

2021

[@AlexTechie]

2:12 Thank me later.

[@BioStock08]

I like you

[@seanlana656]

Thank you very much sir !

[@thanhduytrinh]

Thank you!

[@rubenjohan2843]

Thank you!