In the context of commodities markets, what characterizes contango?

In the context of commodities markets, contango is characterized by futures prices being higher than the expected future spot prices. This situation often occurs when there are costs associated with carrying the commodity, such as storage fees or insurance. Market participants expect that the price of the commodity will not rise enough in the future to justify the higher futures prices.

When a market is in contango, it suggests that investors expect the commodity's price to maintain its value or decrease, which is why they are willing to pay a premium for the futures contract compared to what they believe the spot price will be at the contract's expiration. This pricing structure incentivizes holding commodity futures but may indicate a lack of confidence in the commodity's future price appreciation.

Other options reflect different market conditions. For example, a situation where futures prices are lower than current prices typically corresponds to backwardation rather than contango. Stability in futures prices does not directly relate to the concept of contango, as contango inherently involves a relationship between current prices and futures prices that suggests volatility and changes in market expectations.