CONTANGO

By term structure, we mean one should examine the relative price differences of futures contracts across delivery months. When a near-month contract is trading at a premium to more distant contracts, we say that a commodity futures curve is in "backwardation." Conversely, when a near-month contract is trading at a discount to more distant contracts, we say that the curve is in "contango."... The above figure shows how oil future forward curves, for any given month, have evolved for oil futures during 2004-05, from the typical oil backwardation to contango curves... Each ribbon in the chart represents a forward curve beginning with the front month and ending with the December 2005 contract. The near months are on the left of the ribbon; the far months are on the right of the ribbon. As time goes forward and as price rises, the switch from a backwardated structure - front months over the back - switches to a deeper and deeper carry and a bona fide contango.