Commodities Explained / Commodity Analysis

Read prices across delivery months and understand why a futures strategy can behave differently from a spot price.

A curve compares maturities at one moment

A futures curve plots prices for different delivery months observed at the same time. It is not a chart of one contract's price history. An upward sloping curve is commonly called contango. A downward sloping curve is commonly called backwardation.

A real curve can change direction across maturities. Seasonal patterns, financing, storage and the value of immediate access to material can affect its shape. Record the contract and timestamp for every point before interpreting the pattern.

A futures price is not a guaranteed forecast

Suppose a hypothetical spot quote is 100 and a later futures contract is 105. That does not guarantee the commodity will cost 105 when the contract expires. The contract price can change as conditions and expectations change.

Near settlement, a contract is tied to its specified delivery or settlement mechanism. That relationship is often discussed as convergence. It applies to the relevant specification and location, so an unrelated retail quote is not the appropriate comparison.

Understand the return mechanism

Imagine entering a long futures position at 105. Later, it is closed at 100 while the comparable spot price has stayed at 100. The contract lost 5 per unit before costs. This hypothetical path shows how futures exposure can lose money despite an unchanged spot quote.

Rolling means closing an existing maturity and opening another. Entering a contract quoted above the old one is not, by itself, an immediate realised loss equal to that price gap. Futures use margin rather than payment of their entire notional value. Subsequent price changes, exposure sizing and the rolling method determine the result.

Read the strategy's rules

For a futures fund or index, identify the selected maturities, roll dates, contract weights and whether returns include collateral income. Compare the same return definition over the same dates. Fees and implementation can further separate a fund from its reference index.

A useful worksheet has one line for spot movement, one for the contracts actually held, one for collateral and one for costs. Do not assume backwardation guarantees a profit or contango guarantees a loss. The whole price path matters.

Put it into practice

A long futures contract is entered at 105 and closed at 108. The curve was initially in contango. Did the position necessarily lose money?

Check your answer

No. The contract gained 3 per unit before costs. The initial curve shape alone does not determine the return on a particular position.

Sources and further reading

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