Voiceover: Now that we
know what a trader means when they say that a
market is in contango. Let's think about whether
it would be a bullish or a bearish signal for
prices in that commodity. So, as I mentioned in the last video, it's actually normal for
things to have a contango because it takes into
account the opportunity cost of the cash and the storage
cost for that commodity. So, if something is kind of
in a, in a reasonable contango you really can't make a call
on it one way or the other whether it's bullish or bearish. It's really just something
that you would expect. What's not as usual is a severe contango. Severe contango. And that's when the current
spot price is a lot lower than the future's price
or the forward price. And in that situation as we've
mentioned in the last video it's because that there's
perceived to be a big glut in the market. There's a surplus on the spot market or maybe there's a perceived
shortage at some point in the future. And in general this is
perceived although once again, you can't just look at one simple
signal and be able to you know, bet your life savings on
the direction of the market. It's a very quick way to lose your money but the general view is,
is that a severe contango is a bearish signal. Is a bearish signal for the
future price of that commodity and the reason why it's
perceived to be bearish is because if you have
this huge discrepancy all someone has to do is
buy a bunch of oil today. We assume that these are oil prices. So, buy a bunch of oil today for cheap. Store it and once again, we're
assuming this is severe contango. So this, it won't cost a
$100 a barrel to store this, this oil for a year and then
we agree to sell it for $150. So, we agree, agree to sell it and assuming the storage
cost is less than $100 we're going to guarantee some money. So, if you have a bunch
of people doing this, buying on the spot market it will increase demand
on the spot market, raise prices there but for the future's market, there's a bunch of people who are
now agreeing to sell in the future. So it's going to lower, it's going to increase the supply on the
selling side of the future's contract so to lower the future's prices. So, in general severe contango is
bearish for the future's price.