Many of us invest to multiply money. Such investments are diversified and it includes but not limited to investing in a property, investing in a commodity like gold or stocks/shares. Thus, after several years, the appreciation of value in the possessed commodity is expected to be high in the future. It is this appreciation in value is called as “Contango”.
Contango refers to commodity prices that are higher in the future than today. Its opposite is called backwardation. The debate will likely never be settled, but some market experts believe contango is the normal state for non-perishable goods such as oil or gold because higher futures prices account for the cost of storage. Markets in contango can offer profit to speculators and signal rising prices, but can be money losers for investors in funds that regularly buy and sell futures contracts. On the London Stock Exchange in the 1800s, contango was a fee paid by buyers to sellers for the delay of a payment. The word is believed to be a variant of continue or contingent.
Wait!
I am sure that you would be wondering why am I talking about the etymology and meaning of this word “Contango”. Here is the reason for it. I am sure you will talk about “Contango” to your colleagues tomorrow!
Here are spectacular insights spilled out by Bloomberg comparing oil prices and its storage volume.
Chart: Storage rises as oil falls
MIND THE GAP
April, 2015
- Oil price: $50.09
- 12-month futures price: $58.63
- Contango: $8.54
August, 2015
- Oil price: $45.17
- 12-month futures price: $51.20
- Contango: $6.03
November, 2015
- Oil price $46.14
- 12-month futures price $51.53
- Contango $5.39
Feb. 22, 2016
- Oil price $31.48
- 12-month futures price $40.62
- Contango $9.14
How exciting?
Now, can you make a calculation for the cost of a ship calculating Contango over its lifetime?
Source: Bloomberg
