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Super contango

A contango so steep that deferred futures exceed the nearby by more than the cost of storage, which happens only when physical storage has run out.

In normal conditions arbitrage caps contango at full-carry. Super contango means the arbitrage is unavailable: every tank, cavern and ship is taken, so nobody can buy the spot barrel and store it, and the curve is free to widen until it prices the marginal cost of exotic storage such as floating tankers.

It is a screaming signal of physical distress and it always resolves the same way — production is shut in, demand recovers, storage drains, and the curve flattens or flips to backwardation.

Example: in spring 2020 front-month WTI traded near $20 while the contract six months out traded above $32, a spread far beyond the roughly $0.50 a month that onshore tank storage costs. Traders chartered VLCCs at $100,000 a day purely to store crude.

Related: contango, full-carry, cash-and-carry-arbitrage, negative-oil-price-2020, cushing

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Contango and backwardationTwo futures curves against contract expiry: one rising above spot, one falling below it.The same commodity, priced for delivery at different dates.78.0076.0074.0072.0070.00Futures pricespot+1m+2m+3m+4m+5m+6mMonths until the contract expiresspot price74.00CONTANGOlater contracts cost more than spotBACKWARDATIONlater contracts cost less than spot
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.

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