Commodity Futures Curves: Basis, Storage and Cost of Carry

A curve is a same-time table of different delivery months

A commodity futures curve places multiple maturities of the same underlying specification side by side at one timestamp. Deferred above nearby is called contango; nearby above deferred is backwardation. A curve can contain both: only the first spread may invert, a harvest boundary may create a step, or one delivery month may carry a bottleneck.

Raw spreads change with the number of days between contracts. Compare absolute, percentage, per-month and sometimes annualized differences, but short intervals can produce unstable annualized numbers. Thin deferred contracts, the notice period and an approaching last trading day can make an observed spread more about liquidity than storage economics.

For storable goods, carrying cost provides a reference boundary

A cash-and-carry operator buys physical material, finances and stores it, then sells a future for later delivery. The deferred price must compensate acquisition, financing, warehouse, insurance, loss, inspection and transport. A futures price well above those costs can encourage inventory accumulation—but only for a participant with capacity, credit, deliverable grade and operational access.

The textbook relation weakens for non-storable power, location-bound gas and perishable products. Higher rates raise carrying cost all else equal, but demand and inventory can change simultaneously. Avoid attributing a curve move to rates without checking the physical data.

The operating benefit of inventory can offset positive storage cost

Physical inventory can prevent a factory shutdown, satisfy a delivery obligation or keep equipment running. That operating benefit is described conceptually as convenience yield. When usable stocks are scarce and replacement is uncertain, material available now becomes more valuable, and nearby prices can exceed deferred prices even though storage itself costs money.

Convenience yield is not a coupon paid into an account. It differs by company, location and regime and is often inferred as a residual after cash, futures, financing and storage are aligned. That residual also absorbs measurement error, quality, tax and delivery options, so label it as an estimate.

Basis carries location, quality and logistics inside the difference

This guide defines basis as cash price minus futures price, though some industries reverse the sign. A local elevator price versus exchange wheat, a producing-region crude price versus WTI, or a physical premium versus a metal future includes freight, quality, regional balance, storage and contract month. Always write the equation and the cash specification before saying basis strengthened.

Deliverable cash and futures are expected to converge toward expiry through arbitrage, but remote or off-specification cash is not the same item. Transport disruption, warehouse scarcity, certificates and embedded delivery options can disturb convergence. CM09 decomposes those location and quality differentials.

Separate physical curve economics from a product’s rollover result

Maintaining futures exposure requires replacing an expiring contract. The difference between the contract sold and the one bought affects the path, but “contango equals the same loss” is too simple. Convergence before the roll, roll date, ratio, fees, collateral and index method alter the outcome. Keep curve observation and product P&L in separate records.

The published guide to commodity CFD futures curves and rollover adjustments covers a provider’s reference maturity and account adjustment. This article supplies the physical storage and basis economics underneath it. CM10 covers index methodology and roll return.

Compare fixed spreads with fixed day counts and physical evidence

1. 01Align contracts

   Confirm grade, location, unit, currency, last trading day and delivery terms.

2. 02Define fixed spreads

   Keep M1–M2 or M1–M6 and the sign convention stable.

3. 03Record day counts

   Retain time between maturities and avoid mixing raw with annualized spreads.

4. 04Add physical data

   Align inventory, capacity, utilization, freight and seasonal bands.

5. 05Separate the product path

   Validate rollover rules and realized costs for futures, CFD or index exposure.

Macro Research Workbench can place published EIA inventory and CFTC COT context beside a curve review. Trade Cost Calculator can estimate explicit spread, commission and financing inputs for the product the user specifies, but it does not replace exchange delivery rules or an index methodology.