Are you familiar with the term ‘contango’? No, it’s not a dance that you’ll see on Dancing with the Stars. Contango is a term used to describe an investment environment when futures prices are higher than current prices, known as ‘spot prices.’
In a normal investing world, futures prices are lower than spot prices. The futures market allows large companies to plan for the future better by locking in a price for a needed commodity. The seller of the commodity is usually willing to take a lower price for the assurance of sale in the future. Thus, it’s a win-win.
Due to a variety of reasons which are too complex to cover here, oil and natural gas commodity prices have been in contango for several months. Contango creates uncertainty for the buyer of the commodity because they no longer have the long range planning assistance of buying in the future. It’s cheaper to buy on the spot market. I’ll discuss how this affects your heating costs in a future post.