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Current time:0:00Total duration:2:28

Video transcript

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 words 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 futures price or the forward price and in that situation as we've mentioned in the last video it's because that there's there's perceived to be a big glut in the market there's a surplus in 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 bare 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 were oil prices so buy a bunch of oil today for cheap store it and once again we're assuming this is a severe contango so this it won't cost us $100 a barrel to store this this oil for a year and then we agree to sell it for 150 dollars 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 futures 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 futures contract so to lower the futures prices so in general severe contango is bearish for the futures price