Wednesday, July 16, 2008

Backwardation & Contango: Why The Confusion?

Those in the financial press often write about a futures market that is "backwardated" or in "contango." Very often, they get confused when explaining a market in light of these concepts, and believe it or not, this even confused Fed Chairman Ben Bernanke. Last February Bernanke basically said that the then backwardated term structure of the oil market (when near term futures were around $100/barrel and longer dated oil futures were near $90/barrel) suggested that oil prices would fall in the future and inflation would moderate. Of course, as we all know, in the months that followed his statement the opposite happened