Futures, Indices, and Commodities · Calendar Spreads and Basis

Why contango persists in storable commodities

Q: Which of the following is NOT a meaningful component of cost-of-carry for crude oil?

Right. Exchange fees are a tiny per-contract transaction cost on the futures themselves — not a component of carry for the physical barrel. The carry is about storing the barrel itself.

Understand why oil, natural gas, and grain futures spend most of their time in contango — and what the storage economics look like up close.

3 min read+25 XPLesson 36 of 49

Start reading

Lesson path

Futures, Indices, and Commodities

Calendar Spreads and Basis

Lesson 36 of 4973%

1. Read the concept 2. Answer the check 3. Save after the check

Pass the check before saving this lesson.

Pass the check to unlock next Open track map Change starting point

Lesson 36 of 49Futures, Indices, and CommoditiesCalendar Spreads and Basis

Today's tiny win: make one idea click.

Understand why oil, natural gas, and grain futures spend most of their time in contango — and what the storage economics look like up close.

Learn itSpot itPass the check

Why the carry bill never goes away

Storable commodities — crude oil, natural gas, wheat, corn, sugar, coffee, copper — spend most of their lives in contango. This isn't a quirk of futures markets. It's the gravity of cost-of-carry. As long as it's physically possible to store the commodity, someone is paying to do it. And those costs have to be reflected somewhere on the curve.

Take crude oil as the cleanest example. To hold a barrel for three months, you need a tank — and tanks aren't free. Rental rates at major hubs like Cushing, Oklahoma fluctuate but generally cost a few cents per barrel per month. You also need to finance the inventory: that barrel ties up capital, and that capital has an opportunity cost equal to short-term interest rates. If rates are 5 percent and oil is 75 dollars, that's about 30 cents of financing per barrel per month. Add insurance, transportation logistics, and minor losses to evaporation and you get total monthly carry of maybe 50 to 80 cents per barrel. Three months of that is roughly the gap you see between front-month and three-month-out contracts in normal conditions.

Wick saysAt 5% rates and $75 oil, financing one barrel costs about 30 cents a month.

Wick saysAdd up three months of carry and you get about the normal gap to the third month.

The same logic applies to natural gas in salt-dome storage, wheat in grain elevators, and copper in LME warehouses. Each commodity has its own carry profile. Gas storage is expensive and seasonal. Grain storage is cheap but limited in capacity. Copper warehouse rents are tiny relative to the metal's value. But the framework is identical: spot price plus accumulated carry equals the back-month futures price, minus a small adjustment for convenience yield. Whenever the convenience yield is low — when inventories are comfortable and no one urgently needs the physical — carry wins and the curve sits in contango.

Wick saysWhen nobody urgently needs barrels, carry wins and the curve stays in contango.

Recap: contango is the resting state for storable commodities because the storage bill never sleeps. Tank rent, financing, and insurance accumulate every month. Back-month prices have to clear those costs or arbitrage flattens the curve. Only physical scarcity flips it.

Knowledge check

Answer before moving on.

0 / 2 answered

1. Which of the following is NOT a meaningful component of cost-of-carry for crude oil?

2. Short-term interest rates rise sharply. All else equal, what happens to the contango slope in crude oil?

Lesson handoff

Pass the check before saving.

Use the knowledge check first. After you pass it, this card turns into the save-and-continue handoff.

Pass the check first Open track map