What Is the Concept of ‘Contango’ and ‘Backwardation’ in Futures Pricing?

Contango occurs when the futures price is higher than the spot price, which is the typical scenario due to the cost of carry. Backwardation occurs when the futures price is lower than the spot price.

Backwardation is less common and often suggests that the market expects the spot price to fall significantly by the contract's expiration or there is a high demand for the spot asset.