Contango is a market condition where futures contracts trade at prices higher than the current spot price, creating an upward-sloping futures curve. This occurs when future delivery is expected to be more expensive than immediate delivery, often due to storage costs, insurance, financing costs, or expected supply shortages.

Contango is normal for storable commodities where carrying costs justify higher futures prices. However, it can negatively impact long-term futures investors through “roll yield” as contracts approach expiration and converge to spot prices. The opposite condition, where futures trade below spot prices, is called backwardation. Understanding contango helps traders make informed decisions about futures positioning and rolling strategies.

Real-world example: Crude oil spot price is $70 per barrel while six-month futures trade at $75, reflecting storage costs and financing expenses, creating a contango market structure.