A commodity futures curve slopes upward. What does that tell you about the market’s view of future prices?

Answer: B – Almost nothing – it reflects carry

An upward-sloping curve almost always reflects carry rather than a view. Holding the physical commodity costs storage, insurance and financing, and returns a convenience yield to whoever needs it on hand; when the costs exceed that yield the far contract must trade above the near one, or the cash-and-carry trade is free money. So contango is a statement about the cost of storage, not a forecast that prices will rise, and backwardation likewise says the convenience yield is high rather than that prices will fall. The curve sits where it does precisely because the arbitrage has already been taken.

• A. The commonest misreading. An upward curve is usually just positive carry.
• B. Correct. Storage and financing exceed the convenience yield, which is a cost statement rather than a forecast.
• C. That would be backwardation, and it would still be about carry rather than about views.
• D. The curve sits where it does precisely because the cash-and-carry arbitrage has already been taken.

Takeaway: Contango is the sign of carry, not a prediction.