What characterizes the price pattern known as contango?

Contango is characterized by a situation where the forward prices of a commodity are higher than the spot prices. This pricing pattern often occurs in markets for commodities that will be held or stored, indicating that investors expect the prices to rise in the future. The higher forward prices reflect the costs associated with storage, financing, and the time value of money, which all contribute to the expectation that prices will increase.

In a contango market, market participants may anticipate increasing demand, supply constraints, or other factors that would lead to higher future prices. As a result, the future price is set above the current spot price, reflecting anticipatory factors rather than immediate supply and demand conditions. This phenomenon is significant for traders and investors as it can affect their strategies, particularly in futures trading, where decisions may hinge on expected price movements. Understanding contango is essential for effectively managing risk and making informed investment choices in the commodities market.