What is Contango and Backwardation?

In this short clip Will de Lucy shares his screen to explain time spreads in oil as the price of WTI crude futures turned negative for the first time to -$40 per barrel. 

The move lower was due to a perfect storm where higher supply from producing nations met an immediate withdrawal of demand due to Covid-19.

This created an acute problem for anyone with long positions in oil in the futures market.

As the contract came close to expiry, all those holding a long contract would need to take delivery. The only problem being, there was nowhere to store it as all the normal facilities were already full.

This forced the near delivery month price sharply lower, letting it trade at a $60 discount to the June contract. A pattern known as Contango.

In 'normal' times the market is 'tight', where supply closely meets demand and the oil market is in Backwardation, where near term prices are higher than prices for delivery further out in the future. 

Enjoy the video!