Contango and Backwardation: What the Curve Costs to Hold

The curve is a price for time

A single commodity has many futures prices at once, one per delivery month, and the list is the curve. The CFTC glossary defines contango as a market “in which prices in succeeding delivery months are progressively higher than in the nearest delivery month,” and backwardation as the reverse, “futures prices are progressively lower in the distant delivery months.”

Neither shape is an anomaly. An upward curve is what you would expect when holding the barrel costs money every month; a downward curve is what you get when the barrel is worth more in your hands today, which happens when prompt supply is tight. The slope is the market’s price for the difference.

What builds the gap: storage, financing and convenience yield

The CFTC glossary calls the components carrying charges, or cost of carry: “cost of storing a physical commodity or holding a financial instrument over a period of time. These charges include insurance, storage, and interest on the deposited funds, as well as other incidental costs.” It adds that a market is a “carrying charge market” when each successive contract maturity is higher, and that when the charge is enough to reimburse the holder it is a “full charge.”

That gives you a ceiling. If the deferred price sits above the near price by more than the full cost of carrying the barrel, someone can buy the near contract, take delivery, store it and sell the deferred one, pushing the gap back toward the cost of carry.

The floor comes from the other side. Convenience yield is the benefit of having the physical barrel on hand rather than a promise of one: an unexpected draw on inventory, a refinery that needs the right grade this week, a cargo that has to load. When that benefit exceeds storage and financing cost, holders stop carrying the commodity forward and the curve inverts.

Worked example: two curves from the same series

EIA publishes daily settlements for the first four WTI contracts, and the series ends on 2024-04-05, the last date the page carries, so both examples below are dated observations rather than current quotes.

Take the backwardated day first. A long holder rolls by selling the first contract and buying the second:

• Gap captured: 86.91 − 86.10 = 0.81 per barrel.
• As a return on the near price: 0.81 ÷ 86.91 = 0.932%.
• Simple annualization, twelve monthly rolls: 0.932% × 12 = 11.18%.
• Compounded: (86.91 ÷ 86.10)^12 − 1 = 11.89%.

Now the contango day, same arithmetic with the sign reversed:

• Gap paid: 72.40 − 72.52 = −0.12 per barrel.
• As a return on the near price: −0.12 ÷ 72.40 = −0.166%.
• Simple annualization: −0.166% × 12 = −1.99% a year.
• Compounded: (72.40 ÷ 72.52)^12 − 1 = −1.97% a year.

The four-contract version shows why annualizing matters. On 2024-04-05 the first contract was 2.67 above the fourth, which is 3.07% over three monthly steps and about 12.29% simple annualized. On 2024-01-16 the fourth was 0.19 above the first, which is 0.26% over three steps and about 1.05% annualized.

“Contango costs you money” only while you keep rolling

The sentence is true, with an unstated condition. The curve takes nothing from you while you hold a position; it takes it when you sell one month and buy the next, and only if the next month costs more.

The extreme case shows how much sits in that condition. On 2020-04-20 EIA’s first contract settled at −37.63 and the second at 20.43. A long holder rolling that day paid 20.43 − (−37.63), or 58.06 per barrel, to stay long. The next day the first slot printed 10.01, because the nearest contract had become the following month. The damage was not a fall in the “price of oil” in the ordinary sense; it was the cost of moving from one delivery month to the next when nobody wanted the near barrel.

Stop rolling and the mechanism changes rather than disappears. A holder who lets the contract expire takes delivery, then pays storage and insurance — what the carrying charge in the deferred price stood in for. A holder who closes at expiry sells at the converged spot price and has nothing left to roll. Either way, the annualized cost above describes a strategy of staying long indefinitely, not a fee attached to the instrument.

A perpetual swap has no curve, only a funding rate

Crypto perpetual swaps are often described with contango language, but the comparison goes only so far. A perpetual has no delivery dates, so there is no list of prices to slope. Time is priced explicitly: a funding payment between the sides of the book, recalculated at intervals.

OKX’s API documentation states the sign convention plainly — “positive = long positions pay short positions at the next fundingTime; negative = short positions pay long positions” — and notes that “the settlement interval is typically 8 hours but may be adjusted,” so the interval has to be read from the contract rather than assumed. The premium index behind the rate is built from the gap between impact bid and ask prices and the index price, not from a term structure.

The practical difference: a futures roll is a trade you choose to make at a price you can see, while funding arrives whether you trade or not and can change sign.

Where the naive reading goes wrong

Annualizing one step as if it were a rate. The 11.18% above is one observed gap multiplied by twelve. The curve changes shape, so the next roll can be smaller, larger, or the other sign.

Reading the slope as a forecast. An upward curve says carrying costs money and that holders do not currently value prompt barrels highly. It does not say the spot price will fall.

Treating contango as a pure loss. Part of the gap is financing, and a fully funded futures position holds cash earning interest against it. The unrecoverable pieces are storage, insurance, and whatever convenience yield you gave up.

Comparing slopes across different spacing. On 2024-04-05 the one-month gap was 0.93% and the three-month gap was 3.07% — not because the curve steepened, but because three months is three times the interval.

What the primary sources do and do not say

The CFTC glossary supplies the definitions of contango, backwardation, carrying charges, convergence and roll-over, and it does so without attaching a single price to any commodity.

EIA supplies the prices and is explicit about its limit: the NYMEX futures table states that futures prices after 2024-04-05 are not available. Every curve figure in this article therefore comes from 2024 or earlier, and the current spot table carries its own release date, 2026-10-21 for the 2026-10-20 observations. Neither source states a convenience yield for anything; that term is used here as the name of the residual, not as a published number.

OKX documents the funding mechanism and its fields, but the interval for a specific instrument has to be read from that instrument’s record.

Checklist

• Plot the curve before you size the position. Write down the settlement price of every month you might roll into, not just the front one.
• Annualize only to compare. State the interval and whether you compounded, because 11.18% simple and 11.89% compounded are the same observation described two ways.
• Separate carry from financing. Ask how much of the gap is storage and insurance, and how much is interest your cash earns anyway.
• Know your roll date in advance. The cost is realized on the day you trade, and that day is a choice, not an event that happens to you.
• Do not carry the shape across instruments. A funding rate on a perpetual and a slope between two futures months are different mechanisms with different timing.

How these sources were checked

The CFTC glossary at https://www.cftc.gov/ConsumerProtection/EducationCenter/CFTCGlossary/index.htm (read 2026-10-23) supplies the definitions of contango, backwardation, carrying charges, convergence and roll-over. EIA’s NYMEX futures table at https://www.eia.gov/dnav/pet/pet_pri_fut_s1_d.htm (read 2026-10-23) supplies every settlement price used above, for 2024-01-16, 2024-04-05 and 2020-04-20, and states that the series ends on 2024-04-05. EIA’s daily spot table at https://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm (read 2026-10-23) supplies the 2026-10-20 assessment and release date. OKX’s API documentation at https://www.okx.com/docs-v5/en/ (read 2026-10-23) supplies the funding sign convention, the premium index formula, and the note about the settlement interval.