# Contango > Contango is when later futures trade above nearer ones or spot. Learn why it happens, how it erodes long commodity and VIX funds, and how traders use it. Source: https://learn.tradelabsai.com/futures/contango/ Track: Futures · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Contango", https://learn.tradelabsai.com/futures/contango/ Contango describes a futures market where prices for later delivery are higher than prices for nearer delivery, and usually higher than the spot price. A crude oil curve in contango might show $75 for next month, $76 for the month after and $78 a year out. Contango is the normal state for many markets when supplies are ample, because it reflects the cost of storing and financing the asset. It matters most to anyone holding futures for a long time, because rolling positions in contango steadily costs money. ## Why contango happens Recall the cost of carry: futures price ≈ spot + financing + storage minus income. When financing and storage outweigh any benefit from holding the physical asset, later futures are priced higher. See [Spot vs Futures](https://learn.tradelabsai.com/futures/spot-vs-futures/). | Cause | Example | |---|---| | Storage costs | Oil tanks, grain silos, gold vaults | | Financing costs | Higher interest rates widen contango | | Ample supply | Large inventories lower the value of holding physical stock now | | Demand for longer dated hedges | Producers selling far months | Markets with high inventories often show steep contango. In the extreme, when storage fills up, near term prices can collapse far below later ones, as in WTI crude oil in April 2020. See [Storage and Inventories](https://learn.tradelabsai.com/commodities/storage-and-inventories/). ## Contango and rolling A futures holder who wants to keep exposure must sell the expiring contract and buy a later, more expensive one. In contango, each roll sells low and buys high, and if spot prices stay flat, the position loses value over time. This is called negative roll yield. See [Roll Yield](https://learn.tradelabsai.com/futures/roll-yield/) and [Rolling Futures Contracts](https://learn.tradelabsai.com/futures/rolling-futures-contracts/). **Example: The cost of rolling in contango** A fund holds front month crude oil futures. The front month trades at $75, the second at $76. Each month, the fund sells the expiring contract near $75 (it has converged to spot) and buys the next at $76. If spot stays at $75 all year, each new contract falls from $76 to $75 by expiry, a loss of about 1.3% per month, roughly 15% a year, even though the oil price did not change. See [Roll Costs](https://learn.tradelabsai.com/orders/roll-costs/). ## Famous examples - **The USO crude oil fund in 2020:** with front month crude in extreme contango, the fund suffered heavy roll costs and changed its holdings to spread exposure across later months. - **VIX futures products:** VIX futures are usually in contango, so long VIX exchange traded products holding short dated futures have lost most of their value over long periods. See [The VIX](https://learn.tradelabsai.com/volatility/the-vix/). - **Natural gas funds** have historically suffered from steep seasonal contango. See [Natural Gas](https://learn.tradelabsai.com/commodities/natural-gas/). ## Who benefits from contango - **Storage owners** can buy spot, sell futures and earn the spread if it exceeds storage and financing costs, a cash and carry trade. See [Cash-and-Carry Arbitrage](https://learn.tradelabsai.com/futures/cash-and-carry-arbitrage/). - **Short futures holders** gain from roll down if spot stays flat. - **Producers** can sell future output at higher prices than today's. ## Reading the curve The steepness of contango is often measured as the percentage difference between the first and second months, or the annualised spread across the curve. ``` annualised contango ≈ (F2 / F1 - 1) × (12 / months between contracts) ``` Steep contango usually signals oversupply; flattening contango or a move to backwardation often signals tightening. See [Backwardation](https://learn.tradelabsai.com/futures/backwardation/). ## Contango in financial futures In equity index futures, the gap between futures and spot reflects interest rates minus dividends. When rates are above dividend yields, index futures trade above spot in a mild, predictable contango. This is not a storage cost but a financing cost, and investors holding index futures instead of stocks effectively pay that financing. ## Common mistakes - **Holding commodity ETFs long term** without understanding roll costs. - **Assuming a futures price is a forecast** of the future spot price; it mostly reflects carry. - **Ignoring the curve** when choosing which month to trade. ## Frequently asked questions ### What is contango? A market condition in which futures prices for later delivery are higher than for nearer delivery or the spot price. ### Why is contango bad for commodity ETFs? Because funds that roll futures must keep selling cheaper expiring contracts and buying more expensive later ones, losing value if spot prices stay flat. ### Is contango normal? Yes, for many storable commodities with ample supply and for financial futures when interest rates exceed income from the asset. Next, learn the opposite condition in [Backwardation](https://learn.tradelabsai.com/futures/backwardation/). ## Continue learning - Next lesson: [Backwardation](https://learn.tradelabsai.com/futures/backwardation/) - Previous lesson: [Spot vs Futures](https://learn.tradelabsai.com/futures/spot-vs-futures/) - Related: [Spot vs Futures](https://learn.tradelabsai.com/futures/spot-vs-futures/): Spot is the price for immediate delivery; futures price delivery later. Learn the cost of carry formula, why futures trade above or below spot and convergence. - Related: [Backwardation](https://learn.tradelabsai.com/futures/backwardation/): Backwardation is when later futures trade below nearer ones or spot. Learn the causes, convenience yield, positive roll yield and what it signals about supply. - Related: [Roll Yield](https://learn.tradelabsai.com/futures/roll-yield/): Roll yield is the return from futures converging toward spot as they near expiry. Learn how contango and backwardation drive it and how to estimate it. - Related: [Rolling Futures Contracts](https://learn.tradelabsai.com/futures/rolling-futures-contracts/): Rolling moves a futures position from an expiring contract to a later one. Learn when to roll, how to use calendar spreads, roll costs and common roll schedules. - Related: [Storage and Inventories](https://learn.tradelabsai.com/commodities/storage-and-inventories/): Inventories are the buffer between commodity supply and demand. Learn the theory of storage, how stocks affect prices and curves, and the key inventory reports. - Related: [The VIX](https://learn.tradelabsai.com/volatility/the-vix/): The VIX measures expected 30 day volatility of the S&P 500 from option prices. Learn how it is calculated, what levels mean, VIX futures and how traders use it.