Super-contango

Super-contango is a state in which a forward price of a commodity is higher than the spot price to a greater extent than can be explained by the interest and storage costs that explain the usual state of contango.

It is usual for the forward price of a non-perishable commodity to be higher than the spot price, this is called forwardation or contango.

Super-contango means that the forward price exceeds the spot price by more than would be expected because of the factors that usually explain contango.

Super-contango should therefore represent an arbitrage opportunity: sell forward, buy at spot and store until delivery is due on the forward.

Producers of extractable commodities (such as oil and metals) may also exploit the arbitrage opportunity by delaying production, effectively storing the commodity in the ground.

In spite of the apparent arbitrage opportunity, super-contango does occasionally occur. There are a number of possible reasons:

• There is a shortage of storage capacity.
• Output is already expected to run at capacity for the future delivery dates, so storage in the ground in not an option.
• The costs of adjusting output levels.
• There is a lack of credit to fund the arbitrage trade; if the cost of borrowing is high contango will also be high.
• Producers are desperate for cash. This is clearly also linked to the availability of credit.
• Political pressures and constraints: this is particularly likely to be true of oil where output is set by a cartel.