The oil market is slipping into a state known as contango. And while that may sound vaguely dance-inspiring, history suggests the shift isn’t a positive sign for crude prices.
Contango is trader lingo to describe when prices for nearby futures contracts — right now, say December West Texas Intermediate crude
CLZ23,
— trade at a discount to deferred futures contracts, such as January WTI
CLF24,
or even next December’s contract
CLZ24,
What is contango
The term, according to Dictionary.com, is thought to have originated in the 19th century on the London Stock Exchange, describing a fee paid by a buyer of securities to the seller for the privilege of deferring payment.
Granted, the oil market — and other futures markets — are often in contango, reflecting the cost of storage and other factors. But a move out of contango into a state known as backwardation — when nearby contracts trade at a premium to deferred contracts — is often seen as bullish, indicating a tight physical market in which end users are scrambling to secure supplies.
The…
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