Editing Contango (section)

== Economic theory ==
Economic theory regarding backwardation and contango is associated with [[John Maynard Keynes]] and [[John Hicks]].

Keynes in ''[[A Treatise on Money]]''<ref name=keynes1930>{{cite book|last=Keynes|first=John M.|year=1930|url=http://babel.hathitrust.org/cgi/pt/search?q1=backwardation;id=uc1.32106012042997;view=1up;seq=9;start=1;size=10;page=search;orient=0 |title=A Treatise on Money|volume=2|publisher=Macmillan|location=London}}</ref> assumed there are two types of participants in futures markets: speculators and hedgers. Keynes argued that if hedgers are net short, speculators must be net long. Speculators will not go net long unless the futures price is expected to rise. Keynes called the situation where the futures price is less than the expected spot price at delivery (and hence the futures price is expected to rise) normal backwardation.<ref name=Kolb2010>{{cite book|title=Financial Derivatives: Pricing and Risk Management|editor1=Robert Kolb|editor2=James A. Overdahl|url=https://books.google.com/books?id=pV3aMRUKi10C&q=Financial%20Derivatives%3A%20Pricing%20and%20Risk%20Management&pg=PR5|publisher=Wiley|year=2010|location=New Jersey|isbn=9780470541746}}</ref> Industrial hedgers' preference for long rather than short forward positions results in a situation of normal backwardation. Speculators fill the gap by taking profitable short positions, with the risk offset by higher current spot prices.<ref name="Bowden">{{Cite journal |last1=Bowden |first1=Roger J. |last2=Posch |first2=Peter N. |title=In Contango Versus Backwardation, the Truth May Not be in Convenience: Disequilibrium States and the Spot-Forward Balance in Commodity Markets |journal=Procedia Computer Science |year=2013 |volume=17 |pages=266–273 |url=https://core.ac.uk/download/pdf/82028295.pdf |doi=10.1016/j.procs.2013.05.035}}</ref>

Hicks<ref name=Hicks1939>{{cite book|author=J. R. Hicks|title=Value and Capital|url=https://archive.org/details/in.ernet.dli.2015.187380|year=1939}}</ref> "reversed Keynes's theory by pointing out that there are situations where hedgers are net long. In this situation, called contango, speculators must be net short. Speculators will not go net short unless futures prices are expected to fall. When markets are in contango, futures prices are expected to decline." In 1972 Hicks won the [[Nobel Prize]] for economics on the basis of [[Value and Capital]], on the economic equilibrium theory, in particular the issue of the stability of equilibrium in an economic system exposed to external shocks.

Bouchouev argued that traditionally there was always more producer hedging than consumer hedging in oil markets. The oil market now attracts investor money which currently far exceeds the gap between producer and consumer. Contango used to be the 'normal' for the oil market. Since c. 2008–9, investors are hedging against "inflation, US dollar weakness and possible geopolitical events," instead of investing in the front end of the oil market. Bouchouev applied the changes in investor behaviour to "the classical Keynes-Hicks theory of normal backwardation, and the Kaldor-Working-Brennan [[theory of storage]], and looked at how calendar spread options (CSOs) became an increasingly popular risk management tool."<ref name=Bouchoueva2012>{{cite journal|journal=Quantitative Finance|volume=12|number=12|year=2012|series=Commodities|title=Inconvenience yield, or the theory of normal contango|doi=10.1080/14697688.2012.723463|author=Ilia Bouchouev|pages=1773–1777|s2cid=154408201}}</ref>