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Opinion
Stephen Mihm

How We Got to Contango

Both contango and its doppelganger, backwardation, originated in Britain in the 19th century to describe futures trading.
Buy. Sell. But later.

Buy. Sell. But later.

Photographer: Yasser Al-Zayyat/AFP/Getty Images

The send-ups of British manners and the monarchy in the Victorian era by Gilbert and Sullivan may seem quaint and fusty today. But in their penultimate opera, "Utopia, Limited," in 1893, they anticipated at least one mystery of our own time. In one scene a corporate shill is introduced with this: “A Company Promoter this with special education/Which teaches what Contango means and also Backwardation.”

Sounds like the stuff of satire. But anyone following oil prices knows that we’re in contango, a somewhat unusual situation in which a futures price for oil -- a promise to buy and sell crude at a certain price in the future -- is higher than the expected future spot price. Today, that means a supply glut has pushed U.S. crude for May delivery almost $10 a barrel below contracts a year out. This contango encourages traders to store the most oil in 80 years on the premise that it can be sold at a higher price in the future. In other words, investors believe it is more expensive to buy a future contract for oil than simply waiting to buy the oil on the market later.