Contango
A market structure where futures prices are higher than the current spot price, creating negative roll yield for long futures holders.
Contango = (Futures Price − Spot Price) / Spot Price × 100%
A commodity market is in contango when the futures curve slopes upward — deferred contracts trade at a premium to near-dated contracts and to spot. This is the structurally normal state for storable commodities such as crude oil, natural gas, and gold, because holding the physical good incurs storage costs, insurance, and financing.
Contango has a punishing effect on long-only commodity ETFs and passive strategies: as the front-month contract approaches expiration it must be rolled — sold — into the pricier next contract. This continuous process of selling cheap and buying expensive erodes returns even if spot prices are flat. This is negative roll yield.
Traders short the front of the curve or buy physical/spot-replicating instruments to avoid the contango drag. During heavy contango episodes in crude oil (such as 2020), traders chartered supertankers to store physical barrels and earn the spread between spot and futures.
On the desk
WTI crude spot trades at $78.00/bbl. The 1-month futures is $79.20; the 3-month futures is $81.60; the 6-month futures is $84.00. The $6.00 contango from spot to 6-month means a long ETF rolling monthly loses approximately $1.00/month in roll cost even if spot is unchanged.