|
PureBytes Links
Trading Reference Links
|
I'll tell you what contango/backwardation means to me, it means that a hole
bunch of fundamentalist traders are going to be taken to the cleaners. Just
another good reason to trade 99% technically.
Brent
-----Original Message-----
From: I4Lothian@xxxxxxx <I4Lothian@xxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Thursday, December 03, 1998 8:19 AM
Subject: Re: contango/backwardation
>You normally hear contango and backwardation in relation to New York
>contracts. In Chicago the terms I hear used are a "Normal" market (one
with
>carrying charges ), and an "Inverted" market (one with nearby prices higher
>than deferred prices). Just different terms to describe the same thing.
>
>An example of a normal market to an extreme is the Lean Hog market. There
is
>a glut of available nearby supply, not much capability to store product,
and
>weaker demand than anticipated when the farrowings were planned.
>
>Given our glut of supply in most all commodities, and weak worldwide
demand,
>there are not any significant inverted markets I can see right now.
However,
>the corn market of 1996 would be a good example. Nearby prices gained
>dramatically on deferred prices.
>
>Sometimes markets will go inverted when there is a shortage of the
commodity,
>like the 1996 corn market. Other times you will see an inverted market in
the
>first couple of months, despite a glut of supply. This will occur because
the
>owners of the commodity, like farmers holding and storing soybeans, are
>waiting for higher prices in the future to sell their crop. In the
meantime,
>processors of soybeans need to buy them to fulfill their nearby meal and
oil
>contracts. This creates a strong basis, which supports the nearby price
due
>to the relationship of the cash prices in the country to delivery values of
>the futures contracts.
>
>Regards,
>
>John J. Lothian
>
>Disclosure: Futures trading involves financial risk, lots of it!
>
>
>In a message dated 12/3/98 7:53:09 AM Central Standard Time,
stansan@xxxxxxx
>writes:
>
><< Ketayun:
> This is my understanding of these terms.
> In commodities, e.g. oil, cocoa, etc., the contracts for
> future delivery carry a higher price than contracts for
> near term delivery.other factors being equal.
> So a contract for oil expiring in 6 months would usually
> cost more than the same contract expiring in 30 days.
> This is due to several factors one of which is the carrying
> cost. This normal situation is called "Contango" but I'm
> not sure the origin of the term.
>
> However, a year ago long-delivery oil was priced below the
> short-delivery oil and this unusual situation was referred
> to as backwardation. I believe this term is appropriate
> because the relationship of long term to short term is
> backwards.
>
> I hope the RT'ers who deal in commodities can give
> a better explanation.
> BTW at the time of the backwardation in oil occurred
> it was explained partly as due to temporary loss of
> refinery capacity and was a near term factor only.
>
> Regards,
> Stan R. >>
>
|