Using Commodity Futures Term Structure to Read Perpetual Funding

Summary

The document explains contango as an upward-sloping futures curve, where deferred contracts trade above nearer contracts or spot, and backwardation as the reverse. It links these shapes to supply conditions: abundant inventories and stable expectations can accompany contango, while scarcity or immediate demand can accompany backwardation. It also describes roll yield and the potential holding cost of maintaining long exposure in contango.

For commodity perpetual futures, which lack expiry, the article proposes using funding rates and basis as indirect clues to term structure. It suggests checking external futures curves, comparing related contracts for relative-value trades, and watching inventory reports, producer decisions, and geopolitical events. It warns that funding tendencies are not guaranteed and that structural reversals can cause rapid losses, especially with leverage. The discussion is conceptual and promotional; it supplies no backtest or empirical validation, and perpetual funding is only a proxy for the conventional futures curve.

Key ideas

• Contango places deferred futures above nearby prices or spot, while backwardation places them below.
• The article associates contango with ample supply and backwardation with scarcity or strong immediate demand.
• In perps, positive funding tends to charge longs, while negative funding tends to pay longs, but these are tendencies.
• Funding, basis, external futures curves, and related contracts can be combined to assess structure and relative value.
• Inventory releases and other events may change the curve, so leverage and position size require careful control.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.