According to consulting firm McKinsey, the current oil futures market is pointing to a coming balance between demand and supply—a balance which has the potential to render most oil and gas investments uneconomical. The futures market is often a reliable guide to forcasting the future direction of oil prices, and analysts rely on both contangos or backwardation when determining their forecasts. During a supply glut, a contango is typically observed. This is a condition where the spot price for future contracts is far higher than the current price for nearby contracts. This means that people are willing to pay more for a commodity sometime down the road than the actual price for the commodity. Backwardation is noticed when the current demand is higher than the supply, thereby making the nearby contracts costlier compared to future contracts. (Click to enlarge) Until around 2005, backwardation was the normal condition, […]