What does 'contango' mean in commodity markets?

In commodity markets, 'contango' refers to a situation where the futures price of a commodity is higher than the expected future spot price. This typically occurs when the costs associated with holding the commodity, such as storage costs and insurance, lead traders to anticipate rising prices in the future. Essentially, it indicates that market participants expect the price of the commodity to increase over time, resulting in futures contracts trading at a premium to the current spot price.

This phenomenon often reflects market conditions where supply is ample and storage is feasible, allowing investors to lock in prices today for delivery in the future at a higher rate. While this is beneficial for those holding the physical commodity, it creates a dynamic where futures markets can yield higher returns compared to immediate purchases.

The other options do not align with the definition of contango: one describes a backwardation scenario where future prices are below spot prices, and another simply states prices are equal, which is indicative of a different market condition. The option relating to high volatility does not capture the essence of contango either, as contango is more about price expectations and cost structures rather than the fluctuations in market prices.