When is a rising curve just the price of a warehouse?
Contango means deferred contracts cost more than nearer ones — the curve slopes up. The Futures & Forwards course in Derivatives & Leverage gives you that definition. What it does not do, and what a commodity analyst needs, is turn the slope into a measurement.
Because "the curve is in contango" is nearly content-free. A curve can be in contango because storage is being priced normally, or because the physical market is comfortable, or because tankage has become desperate. Those are three different worlds and they all slope upward.
The diagnostic: percent of full carry
You already have the tool. Full carry is the maximum contango that cash-and-carry permits, so measure the observed contango against it:
Percent of full carry = (F − S) ÷ full carry
Take our crude numbers: spot $78.00, six-month full carry $4.55 (financing $1.95 + storage $2.40 + insurance $0.20).
- Curve A — six-month at $82.55. Contango $4.55 → 100% of full carry. The market is paying you precisely the cost of storing a barrel. Storage is available, and it is being bought and sold at its cost. Nobody is short of anything.
- Curve B — six-month at $80.30. Contango $2.30 → 51% of full carry. Still sloping up, but the market is paying only half the cost of storage. The missing $2.25 is convenience yield: someone values prompt barrels enough to eat half the carry.
- Curve C — six-month at $78.60. Contango $0.60 → 13% of full carry. Barely upward at all. Implied convenience yield is $3.95 — this is a physically tight market that happens to have a technically upward-sloping curve.
Curve B, drawn against the ceiling it is being measured from:
Three contangos, three completely different physical situations, one useless adjective covering all of them.
Why full carry acts as an attractor
Curves at exactly 100% of full carry are common in well-supplied markets, and the reason is mechanical rather than coincidental. Above full carry, the cash-and-carry trade prints money, so storage gets hired until the spread closes. Below full carry, holding inventory for its own sake loses money, so anyone storing purely for the spread liquidates — which sells spot and buys the deferred, pushing the spread back up.
The curve is therefore squeezed toward carry from both sides as long as spare storage exists. It is a market clearing the price of warehouse space, denominated in the commodity itself.
That gives you the sentence this unit is built on:
A commodity curve is the price of storage, quoted in the commodity.
The practical reading
- At or near full carry → storage is available and priced; inventories are comfortable or building.
- Well below full carry, still positive → the physical market has some tension; convenience yield is eating into carry.
- Above full carry → the storage assumption in your model is stale. Either real storage costs more than you assumed, or capacity is genuinely scarce. Go and check the rate before concluding anything about sentiment.
Note the discipline in that third line. When a curve exceeds your computed full carry, the first hypothesis is that your carry number is wrong, not that the market is irrational. In commodity markets, that hypothesis is usually right.
Try it now
- Compute today's six-month full carry for crude: financing at the SOFR average below on the WTI spot below, storage at this course's $0.40 a barrel a month, and half a percent a year for insurance.