Futures vs Spot: How Commodity Prices Are Actually Set

When our Commodities desk shows “WTI crude” at some price per barrel, nobody is handing over a barrel at that moment. The quoted price is usually a futures price — an agreement about the future, traded today. Understanding the gap between futures and spot is the key to reading every commodity quote correctly.

Spot: the price of now

The spot price is what the physical commodity costs for immediate delivery, right here, right now. It is the price a refinery pays for oil arriving this week, or a jeweler pays for gold changing hands today. Spot markets are real but fragmented — different grades, locations, and delivery terms mean there is rarely one clean “spot price.” That is why the single number you see quoted almost always comes from somewhere more standardized.

Futures: the price of later

A futures contract is a standardized agreement to buy or sell a set quantity of a commodity at a set price on a set future date, traded on exchanges such as CME or ICE. The “WTI crude price” in headlines is typically the front-month futures contract — the contract expiring soonest.

Why does the world price oil this way? Because futures solve genuine problems. An airline can lock in fuel costs months ahead; a farmer can lock in a selling price before harvest; a manufacturer can fix input costs for next quarter’s production. These hedgers transfer their price risk to speculators, who provide the liquidity that makes the market work and in return get exposure to price moves without ever touching a physical barrel.

Two mechanics keep the system honest. First, margin: traders post collateral and settle gains and losses daily, so nobody can run up a loss they can’t cover for long. Second, convergence: because the contract can end in physical delivery, the futures price must converge toward the spot price as expiry approaches. The delivery threat is what anchors paper prices to physical reality.

Contango and backwardation: the shape of time

Plot futures prices against their expiry dates and you get the futures curve. Its shape tells you what the market expects — and what it fears:

• Contango: future prices are higher than spot. The normal state for most commodities. Storing oil or grain costs money — warehousing, insurance, financing — so deferred delivery should cost more. Mild contango is just the cost of carry; steep contango often signals oversupply right now, with the market paying up to push barrels into the future.
• Backwardation: future prices are lower than spot. The market is paying a premium for immediate delivery — a classic sign of tight supply or a scramble for the physical commodity. Oil backwardation has preceded several price spikes, because it means buyers are desperate for barrels today, not next quarter.

The curve’s shape also reflects expectations about inventories, geopolitics, and demand growth — which is why professionals watch the whole curve, not just the headline contract. For a concrete walk-through of crude’s two global benchmarks, see how oil prices are set; for the metal markets call “Dr. Copper,” see our copper explainer.

The day oil went negative

The delivery mechanism that keeps futures honest produced the strangest trading day in commodity history on April 20, 2020. The May WTI futures contract — expiring the next day — collapsed to a settlement of negative $37.63 per barrel, after touching an intraday low near negative $40.32. Sellers were paying buyers to take oil off their hands. It was the first negative print in the nearly four-decade history of WTI futures trading.

What happened was physics defeating finance. Pandemic lockdowns had crushed fuel demand while production kept flowing; storage at Cushing, Oklahoma — the designated delivery point for WTI futures — was nearly full. Traders holding May contracts faced a brutal choice: take delivery of crude they had nowhere to put, or sell the contract at any price before expiry. With the June contract still trading above $20 the same day, the panic was confined to the expiring contract — but it proved the point permanently: futures are tethered to physical reality, and when the tether snaps taut, paper markets obey.

Cash settlement and the contracts nobody wants

Most futures traders never intend to take delivery — positions are closed or “rolled” before expiry. Some contracts, like many equity-index futures, are cash-settled: no barrels or bushels change hands; the loser simply pays the winner the difference. But even cash-settled contracts reference real underlying markets, and physically delivered contracts like WTI keep the entire system grounded. The negative-oil episode wasn’t a market failure; it was the market telling the truth about full tanks.

The roll trap: why commodity ETFs can lose when prices don’t

This is where retail investors most often get hurt. Funds and ETFs that “track” commodities don’t hold barrels — they hold futures, which expire. To maintain exposure, they must repeatedly sell the expiring contract and buy a later one: the roll.

In contango, that roll loses money every month, because you’re selling low (the expiring contract) and buying high (the deferred one). A commodity ETF can therefore fall steadily even while the commodity’s spot price goes nowhere — the curve’s slope quietly taxes the holder. In backwardation, the roll works in reverse and pays the holder. Before buying any commodity fund, check the curve shape: it determines a large part of your return before prices even move.

Reading our commodities table

When you see crude, gold, or wheat move on the Commodities desk, you are watching front-month futures — the market’s live verdict on supply, demand, storage, and expectations, compressed into one number. Now check the curve behind it: contango means the market is comfortable with today’s supply; backwardation means it is scrambling for it. And if you want to practice reading market visuals without fooling yourself, our guide to reading financial news like a professional is the natural next step.

Sources: CME Group (futures contract mechanics), U.S. Energy Information Administration / Reuters (April 20, 2020 WTI settlement at -$37.63), Oil101 / MPRA research paper (Cushing storage constraints; cash-and-carry dynamics), Investopedia (contango, backwardation, contract rolling).

This article is educational and is not investment advice.