A commodity forward curve compares prices quoted now for different delivery dates. Read its slope, identify physical specifications and distinguish a curve from a forecast.
Commodity forward curve
A commodity forward curve is the set of prices quoted at one observation time for buying or selling a specified commodity at different future delivery dates. A manufacturer buying inputs across the year needs the price for each delivery date; one headline commodity price cannot describe that schedule.
Write the forward price as F(t,T): t is the observation time and T is the delivery date. To draw a curve, hold t fixed and vary T. Following one contract as t changes produces a price history instead.
Read across delivery dates
Suppose the following fictional forward contracts are quoted simultaneously. Each covers the same grade, delivery location and standard physical unit, with payment and delivery on its specified date. The prices are illustrative agreed delivery prices, with bid–ask spreads and fees omitted.
Time from observation to delivery
Forward price (USD per unit)
1 month
100
3 months
103
6 months
107
One simultaneous forward-curve snapshot: delivery in 1 month costs 100 USD per unit, 3 months costs 103, and 6 months costs 107. Delivery maturity is horizontal; forward price is vertical. All three filled markers represent quoted contracts.
Original fictional forward quotes, all observed at one valuation instant for the same commodity grade, location and standard unit. Months measure time to delivery. The connecting segments guide the eye; no intermediate quotes or future spot prices are supplied.
The three-month quote exceeds the one-month quote by USD 3 per unit; the six-month quote exceeds the three-month quote by USD 4 per unit. Across the full quoted span the difference is USD 7 per unit. Those are price differences between contracts, not gains earned by holding a contract. They also cover unequal maturity intervals.
This snapshot slopes upward across its quoted maturities. Using the near-versus-deferred convention, it is in contango; falling prices across maturities would indicate backwardation. State the dates being compared: a seasonal curve can rise over one interval and fall over another. Some sources instead define these terms by comparing a particular forward or futures price with current spot. A single spot comparison does not establish the slope across all delivery dates.
Nothing in the table says that spot will be 100 next month, 103 in three months or 107 in six months. Prices for future delivery reflect financing, physical-market conditions and risk bearing as well as expectations. The distinction between futures prices and expected future spot prices is developed in Hull, Chapter 5, §5.14.
What is the commodity being promised?
A useful curve identifies grade, location, quantity unit, currency and delivery date or window. It also states whether each point is a bid, ask, trade, settlement or model estimate, and when it was observed. Mixing locations or stale observations can create an apparent slope that actually reflects different products or different market times.
For storable goods, financing and storage costs help connect delivery dates. Convenience yield captures the operational benefit of available inventory: a contract for later delivery cannot keep a plant running today. Storage capacity, transport limits and restrictions on borrowing physical goods can weaken simple arbitrage relationships. Hull’s §§5.11–5.13 distinguish these constraints from the cleaner investment-asset case.
Seasonality can produce humps rather than a uniform slope. For example, heating demand and storage affect natural-gas delivery prices across seasons. The EIA’s natural-gas explanation illustrates how supply, demand and inventories shape the futures curve. That economic story must be matched to the actual delivery months and market location; the three illustrative quotes above do not identify a seasonal pattern.
The Commodities lesson connects these physical specifications to storage, curve shape and a producer hedge. Its preview is public; the full lesson requires a free signed-in account.
Forward curve or futures curve?
A curve assembled from exchange-traded futures contracts is precisely a futures curve, although commodity commentary often calls it a forward curve. Futures have standardized exchange terms and daily settlement; an OTC forward can have negotiated terms. Check the actual agreement for collateral and settlement rules. CME’s contract comparison and daily-settlement explanation describe these mechanics.
Forward and futures prices for matched delivery can coincide under idealized conditions, including deterministic interest rates. Daily cash-flow timing, uncertain rates and contractual differences can make them differ; Hull §5.8 explains why treating them as identical is an assumption.
Curve shape helps select delivery dates, design hedges and compare calendar spreads. It does not guarantee the result of rolling a position. That result depends on the contracts traded, their price changes through time, position sizing, costs and collateral cash flows. A curve snapshot alone supplies none of that complete trading history.
Sources
John C. Hull, Options, Futures, and Other Derivatives, Ninth Global Edition, Pearson, 2018, Chapter 5, especially §§5.8 and 5.11–5.14, pp. 136–137 and 142–146.
