Often the price quoted for a commodity is the cash or spot price or more often, it is the price of the active month futures contract traded on a futures exchange.
Market structure includes premiums or discounts for different grades of a commodity, processing spreads where one commodity is a product of another, substitution of one commodity for another or inter-commodity spreads and calendar spreads.
Calendar spreads are the price differentials that the same exact commodity has for different delivery periods or different times.
The examples of steak and gasoline illustrate that, from a purely economic standpoint, commodity prices are efficient.
Understanding contango and backwardation can assist you in analyzing the current supply and demand characteristics of any commodity market.
Contango Oil & Gas Company is a Houston, Texas based, independent oil and natural gas company.
The Company’s business is to maximize production and cash flow from its onshore properties in Texas and Wyoming and its offshore properties in the shallow waters of the Gulf of Mexico and to use that cash flow to explore, develop, exploit, produce and acquire crude oil and natural gas properties in the onshore Texas and Rocky Mountain regions of the United States.
In fact, if supplies are extremely high producers may cut back on future production.
The surplus will then decrease and prices will rise by virtue of less production.
It represents an upward sloping shape on the futures forward curve.