In this video on severe contango the author says that if the spot price is way under the futures price, a lot of people will buy oil on spot price and enter a short position. Then he says :

...it's going to increase the supply on the selling side of the future's contract so to lower the future's prices.

I thought the futures price was fixed at regular interval based only on the spot price with compounding and some extra costs, but not supply and demand on its own market. So how the high supply can lower futures price ? Because if the spot price raises, then the futures price should also raise, other things being equal. What am i missing ?


1 Answer 1


No, commodity futures prices do not always move inline with spot prices. Many commodities (Natural Gas is a good example) have seasonality which reflect supply and demand changes over time. Oil can as well, though not as dramatic, since gasoline (the main consumer byproduct of oil) also has seasonal supply/demand differences. Also, a low spot price can discourage production, lowering supply in the near future and raising futures prices.

So it's perfectly reasonable in a contango market to buy physical oil at the current low price, store it, and enter into a short futures position to sell it at a relatively higher price. If the difference is more than your storage costs, you can make a risk-free profit.

how will the high supply in short position lower the futures price ?

By "supply in short position" the video means "people selling futures contracts", not the supply of the commodity itself. When you get lots of people selling futures contracts, the price goes down (just like a stock). So the market returns to some equilibrium where the spot price rises (because people are buying the commodity today) and the futures price lowers (because they are selling it in the future).

  • $\begingroup$ Ok so how, and that's my main question, the high supply in short position will lower the futures price ? $\endgroup$
    – TmSmth
    Jul 30, 2019 at 20:07
  • $\begingroup$ Just saw your edit, you say When you get lots of people selling futures contracts, the price goes down (just like a stock)and "how" was my question. So price of futures contract are driven also by supply and demande like any other market ?! $\endgroup$
    – TmSmth
    Aug 2, 2019 at 12:59
  • 1
    $\begingroup$ @TmSmth Correct - when there is selling pressure on futures contracts (there is more "supply" than "demand"), the price goes down. $\endgroup$
    – D Stanley
    Aug 2, 2019 at 13:14

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