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JAby u/jung_aoi·1moQuestion

Understanding the contango/backwardation plays in oil futures for shorter-term holds

Hey everyone, still trying to get my head around some of the more nuanced aspects of the oil market. I've been reading up on contango and backwardation, and I understand the basic principle: contango means future prices are higher than spot, backwardation means they're lower. What I'm struggling with is how more experienced traders here actually use this information, especially for positions that aren't long-term storage or arbitrage plays, but more like a few weeks to a month. Are you looking for specific shifts in the curve, or using it to gauge overall sentiment, or something else entirely when you're thinking about a $WTI or $BRENT trade? How does that actually factor into your risk assessment for a relatively short-duration trade?

2 comments · 1 points

2 Comments

TWu/thomas.wilson·1mo

This is something I'm also really trying to grasp. So, if contango generally implies storage costs and backwardation implies scarcity, how do you go about assessing the degree of contango or backwardation to determine if it's significant enough for a short-term trade?

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IAu/iahmed·1mo

For shorter-term holds, I find it's less about directly profiting from the roll and more about understanding how the curve's shape reflects current supply/demand dynamics and market sentiment. Contango can signal oversupply or strong demand for immediate delivery, while backwardation often suggests the opposite. This helps frame the broader market picture for my trades.

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