Contango/Backwardation

[Nikk]

Hi, I'd to know how do you estimate the Contango/Backwardation present in a given commodity.

Do you watch every contract, or just the nearest (3/4)?

Do you consider it a significant indicator for every commodity, or just agricultural, or maybe energy?

Thanks, Nikk 😀

 

[-oo0(GoldTrader)]

Nikk, that’s a good question. Ross’s book on “Seasonal Spreads ,” has a chapter that gets into Contango and Backwardation. He teaches how to find it, how to use it and how to trade it.

Hi, I'd to know how do you estimate the Contango/Backwardation present in a given commodity.

See Contango & Backwardation what is it used for.

Contango
A condition in which distant delivery prices for futures exceed spot prices, often due to the costs of storing and insuring the underlying commodity, opposite of backwardation.

Backwardation
A market condition in which a futures price is lower in the distant delivery months than in the near delivery months.

Do you watch every contract, or just the nearest (3/4)?

Do you consider it a significant indicator for every commodity, or just agricultural, or maybe energy?

It’s always significant. Once you know what it looks like, you can see it everywhere. Those who do not know, do not know!

 

[TWI]

It is important to look at the spreads for every commodity if you want to trade them effectively, as for knowing the real value this is a result of so many supply/demand factors that the market is your best idea of the true value. It is always good to consider a base case which is what the commercial pays for carrying the physical commodity from one month to the next. The cost will be composed of the loss of interest on the capital which is invested in stock and the cost to house the physical commodity in a shed. The reason there is a difference from this value to the market is the supply/demand factor, commodities will be in contango in a stable currency if supply/demand is balanced. Backwardation will be most pronounced when there is shortage in the spot for example you are passing from a contract that relates to the current or old crop cycle to a contract that relates to new crop. The obvious reason being that when new crop comes in farmers will be puking the stock so supply is greatest. This can also happen at the end of the old crop cycle as nobody wants to be carrying old crop into the new crop year or if the new crop is delayed then old crop gets tight and the backwardation can get very large.
Same thing with all other non-agricultural commods too. In cash markets carry can be effected by something like ship line-ups at a port so people make assumptions as to when a vessel will have unloaded the particular cargo so trashing the price of that particular product etc.