The only commodity supply-demand indicator that matters

For an industrial commodity with a liquid futures market, the ‘term structure’ of the futures market is the most useful – perhaps even the only useful – indicator of whether physical supply is tight, abundant or somewhere in between.
The term structure of a commodity futures market is the prices of futures contracts for the commodity over all available expiration months. It can be displayed as a chart, with price along the vertical axis and the expiration months along the horizontal axis. Here are examples for oil and copper.
If a market is in ‘contango’ then the later the delivery month the higher the price, resulting in the chart of the term structure being an upward-sloping curve. If a market is in ‘backwardation’ then the earlier delivery months will have the higher prices and the term structure will be represented by a downward-sloping curve. It is also possible for the curve representing the term structure to have an upward slope over some future delivery periods and a downward slope over others. This often happens with commodities that experience large seasonal swings in production (e.g. grains) or consumption (e.g. natural gas), but it can also happen with other commodities.
For an industrial commodity such as oil or copper it will be normal for the term-structure curve to slope upwards, that is, for the market to be in ‘contango’, with the extent of the ‘contango’ reflecting the cost of physical-commodity storage.

This post was published at GoldSeek on 22 February 2017.