Module 08 · Commercial Thinking10 min read

Forward curves

The shape of time — and what it tells you to do.

Executive summary

A forward curve is the market's price for the same commodity delivered at different future dates. Its shape — sloping up (contango) or down (backwardation) — encodes the economics of storage, financing and scarcity. Reading the curve correctly tells a trader whether to store or sell, how hedging will cost or pay, and where the market thinks supply is tight.

In plain English

The spot price is today's price. Futures prices are the cost of delivery in one, two, three months and beyond. Plot them in order and you get the forward curve. When later months are more expensive, the market is in contango (upward curve). When later months are cheaper, it's in backwardation (downward curve).

Contango: Forward prices above spot — an upward-sloping curve. Typical when carrying costs dominate.
Backwardation: Forward prices below spot — a downward-sloping curve. Typical when owning the physical now is valuable (tight supply).
Cost of carry: Financing + storage + insurance of holding the physical over time.
Convenience yield: The implied benefit of holding the physical commodity itself (e.g. to keep a process running) — it pulls the curve toward backwardation.

A useful approximation: Forward ≈ Spot + financing + storage + insurance − convenience yield. When carry costs dominate, the curve is in contango. When the convenience yield is high — buyers will pay a premium to have the barrel or tonne now — the curve flips into backwardation.

Why traders care

Storage signal: a contango steeper than your cost of carry pays you to store; backwardation penalises holding and rewards selling now.
Hedging cost: rolling a hedge from one month to the next costs money in contango and earns money in backwardation (the 'roll yield').
Scarcity signal: a curve moving into backwardation is the market shouting that prompt supply is tight.

Operator connection

The curve sets the strategy; the operator executes it. In contango, the operator books tank or warehouse space and slows the cargo down to capture the carry. In backwardation, the operator rushes the cargo to market because every day of delay costs money. The laytime, storage and scheduling decisions you learned in the core course are the physical expression of the curve.