Contango vs. Backwardation

Contango is a term used in the futures market to describe an upward sloping forward price curve (as in the normal yield curve). Such a forward curve is said to be "in contango" (or sometimes "contangoed").  Futures contracts have specific maturity dates for delivery such as March ’09, June ’09, etc.  If you are buying wheat for delivery in June of 2009, you may pay 50 cents additional over the current price (spot price).  This is the contango scenario.

Formally, it is the situation where, and the amount by which, the price of a commodity for future delivery is higher than the spot price, or a far future delivery price higher than a nearer future delivery.

The opposite market condition to contango is known as backwardation.

Backwardation occurs in seasonal commodities such as natural gas where in the winter shortages may occur and force the short term price up whereas prices in the future assume no shortage.  Dramatic immediate demand causes backwardation.

As of 12/19/08, The spot price for natural gas was higher than the futures price:


                                                       PRICE*   CHANGE     % CHANGE        TIME

Nymex Henry Hub Future       5.33         -.21           -3.86            12/19

Henry Hub Spot                     5.68          .04               .71            12/19


Anticipated increased demand in the future causes future prices to rise relative to immediate price transactions.  Expected reductions in demand cause prices to decline… in normal circumstances in the current system.

When a financial tsunami hits, futures markets react differently and cause investors to move away from greed and respond with fear.  Investors begin to liquidate positions due to the unknown.  Technical models no longer work and fundamental investing is put on hold.  Price volatility sends amateur investors heading for the doors.

When an abnormal contango occurs, suppliers respond by buying near term contracts and sell longer term contracts.  Currently, large oil companies with plenty of cash are buying oil (rather than producing it) at $34 and immediately selling it on a futures contract for $43.  They have leased tankers to sit in the harbor and store this oil until the delivery date (within30-60 days) and pocket a $9 profit per barrel less cost of storage.  See:

If you have $90 Million handy, you can do the same.

The Kingdom of God does not operate on speculation (contango & backwardation) but on wisdom, understanding, knowledge, and skill from above.  Joseph was given instruction from Our Heavenly Father in dealing with a Great Depression/famine in the times of Pharaoh.  When David was king, the country entered into a famine.  He inquired of The Lord and found out what to do in order to end the famine.  Wisdom from above is required to get us through these times of great perplexity.  Elijah prayed earnestly to end the drought on the land.  Supernatural intervention is the key to solving the world’s crisis.  It appears that man has now reached his "level of incompetence" in dealing with this more complex world.  Leaders are groping around for solutions to the myriad of problems confronting the nations.  Iceland is bankrupt, Ecuador is in sad shape, and Greek protestors are frustrated with government’s ineffective handling of the economy.

Events are occurring in an accelerated fashion.  This acceleration defies man’s understanding and is causing many to question the future of their nation as well as the global economy.  It would appear that we are at an end of an age where complexity ultimately crumbles under its own weight.

What should the individual do?  We should each seek The Father’s Face.  We should enter into our closet, be still, and wait on The Lord.  Jesus didn’t say "if you pray", He said "when you pray".

Mat 6:5-13

"And when you pray, you shall not be like the hypocrites. For they love to pray standing in the synagogues and on the corners of the streets, that they may be seen by men. Assuredly, I say to you, they have their reward.

"But you, when you pray, go into your room (closet or booth), and when you have shut your door, pray to your Father who is in the secret place; and your Father who sees in secret will reward you openly.

"And when you pray, do not use vain repetitions as the heathen do. For they think that they will be heard for their many words.

"Therefore do not be like them. For your Father knows the things you have need of before you ask Him.

"In this manner, therefore, pray:

Our Father in heaven,

Hallowed be Your name.

Your kingdom come.

Your will be done

On earth as it is in heaven.

Give us this day our daily bread.

And forgive us our debts,

As we forgive our debtors.

And do not lead us into temptation,

But deliver us from the evil one.

For Yours is the kingdom and the power and the glory forever. Amen.

Those who are motivated by Love and service to mankind will receive the wisdom, understanding, knowledge, and skill to establish HIS Kingdom on this earth.

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