Monday. Brent spot: 85 USD. 1-month future: 83 USD. 3-month: 80 USD. 12-month: 75 USD. That's backwardation: spot above futures. Market message: "Oil is TIGHT right now, but relief expected later." Rational: speculators pay premium for immediate oil because supply is constrained.
Different day. Brent spot: 85 USD. 1-month: 87 USD. 3-month: 90 USD. 12-month: 92 USD. That's contango: futures above spot. Market message: "Oil is abundant now, prices expected higher later (or storage costs are real)." Rational: wait until you need it, because future input prices are expected cheaper.
Definition: Spot and futures
Spot price: Price oil trades TODAY, delivery in 1–2 days ("prompt"). Brent basis: London ICE exchange, "Dated Brent" (physical ship, immediate delivery). Your heating-oil dealer buys at roughly spot + 2–5 USD (local logistics, storage).
Futures market: Standardized contracts, delivery 1/3/6/12 months out. Traded daily at ICE. Speculators and hedgers price these: "What will industry pay in 3 months (when delivery is due)?"
Contango vs. backwardation historically
Normal (contango): 2018–2019, 2021–2023 (stable). Futures 2–5 USD above spot. Means: "Oil accumulates in storage, costs included, price falls later."
Backwardation (shortage signal): 2008 (demand fear but physical tightness), 2011 (Libya), 2020 (COVID demand drop but refinery shutdowns), 2022 (Ukraine supply fear). Spot +5–10 USD above futures. Means: "I need oil NOW, pay premium for immediate delivery."
What the curve shape reveals about supply
Backwardation (steep, spot far above futures): Market fears short-term tightness. Refiners pay premium for immediate oil. Signals: Hormuz tensions, OPEC cuts, surprise shutdowns. Time horizon: 2–8 weeks, then market adjusts (SPR release, alternative sources), price normalizes.
Flat curve (little spot-future difference): Market uncertain, supply balanced. Typical: transitions, normal demand cycles. Low risk premium.
Contango (futures trending up, futures above spot): Market trusts stable/growing supply. Storage cycle: oil is stored (cost 0.30–0.50 USD/bbl/month), sold later. Speculators: "Buy spot, store, sell 6-month future for profit." Signals: not tight, rather oversupply-trend.
How consumers can read this
Backwardation: If spot-future spread >3–4 USD, market is nervous. "Prices now are high, but relief expected." For you: if heating oil price is high NOW, wait might be tempting (future inputs cheaper). But timing is hard, market can shift fast (e.g. new Saudi cuts = new backwardation).
Contango: If futures steadily above spot (+1 USD/month), market is calm. "Prices later, not much higher." For you: could be good time to BUY, since 3-month prices not expected much higher.
Action: Futures curve as early signal
- Watch curve shape daily (Bloomberg, CNBC, market-index sites show Brent strip).
- Backwardation as warning: steeper = higher shortage fear. Could mean 2–4 weeks until your heating bill hits. If no order placed, do it soon.
- Contango for timing: if flat, less urgent. Can wait 2–3 weeks, see if prices drop or hold.
- Note spreads: Track Brent spot-3month spread. Sudden shift 6–8 USD OR flip to backwardation = market stress. Monitor it.