Voiceover: Now that we know what a trader means
when they say that a market is in contango.
Let's think about whether it would be a bullish
or a bearish signal for prices in that commodity.
So, as I mentioned in the last video,
it's actually normal for things to have a contango
because it takes into account the opportunity cost
of the cash and the storage cost for that commodity.
So, if something is kind of in a, in a reasonable contango
you really can't make a call on it one way or the other
whether it's bullish or bearish.
It's really just something that you would expect.
What's not as usual is a severe contango.
Severe contango.
And that's when the current spot price is a lot lower
than the future's price or the forward price.
And in that situation as we've mentioned in the last video
it's because that there's perceived to be a big glut
in the market.
There's a surplus on the spot market
or maybe there's a perceived shortage at some point in the future.
And in general this is perceived although once again,
you can't just look at one simple signal and be able to you know,
bet your life savings on the direction of the market.
It's a very quick way to lose your money
but the general view is, is that a severe contango
is a bearish signal.
Is a bearish signal for the future price of that commodity
and the reason why it's perceived to be bearish
is because if you have this huge discrepancy
all someone has to do is buy a bunch of oil today.
We assume that these are oil prices.
So, buy a bunch of oil today for cheap.
Store it and once again, we're assuming this is severe contango.
So this, it won't cost a $100 a barrel to store this,
this oil for a year and then we agree to sell it for $150.
So, we agree, agree to sell it
and assuming the storage cost is less than $100
we're going to guarantee some money.
So, if you have a bunch of people doing this,
buying on the spot market
it will increase demand on the spot market,
raise prices there
but for the future's market,
there's a bunch of people who are now agreeing to sell in the future.
So it's going to lower,
it's going to increase the supply on the selling side of the future's contract
so to lower the future's prices.
So, in general severe contango is bearish for the future's price.