How is Contango hedging its exposure to oil price volatility, and what impact could that have on future earnings?

How Contango is hedging its oil‑price exposure

Contango ORE (CTGO) has leaned heavily on a structured “contango” trading model that locks in the spread between the higher‑priced forward market and the lower‑priced spot market. In practice the company builds its inventory in the cheap, “backward‑curved” segment of the oil curve (e.g., WTI or Brent at $70‑$75 per barrel) and simultaneously sells forward contracts at the more expensive forward points (typically $85‑$95 per barrel for 12‑‑24‑month delivery). The difference between the forward price and the spot price—its “contango spread”—is captured as a near‑cash, low‑volatility margin. The firm also uses over‑the‑counter (OTC) swaps and calendar‑spread options to fine‑tune the hedge ratio and to protect against adverse moves in the forward curve.

Implications for future earnings

By monetising the contango spread, Contango essentially converts a portion of its inventory into a fixed‑margin, “synthetic” cash‑and‑carry trade. This strategy smooths earnings because the realized spread is booked in the quarter it is locked in, regardless of short‑term spot‑price swings. The Q2‑2025 results—$23 million in operating income and $15.9 million in net income—reflect that the company has been able to capture a relatively wide spread in a market where the forward curve remained steep. As long as the forward curve stays in contango (i.e., forward prices > spot), the model will continue to generate incremental, non‑cyclical profit, insulating the bottom line from the volatility that typically hits upstream producers.

Trading take‑aways

• Fundamentals: The earnings boost is largely a function of the contango spread, not a permanent uplift in oil‑price fundamentals. If the curve flattens or flips into backwardation, the spread narrows and the hedge‑generated earnings will compress. Watch inventory levels, forward‑curve shape, and swap book‑size for early warning signals.
  
• Technical: CTGO has broken above its recent resistance around $1.30 and is testing the $1.40‑$1.45 zone—levels that historically coincide with a 20‑day moving‑average bounce. A hold‑or‑buy stance is justified if the stock can hold above $1.35, reflecting confidence that the contango spread will stay robust. A break below $1.30 could trigger a retest of the $1.20‑$1.25 support, where the risk of a earnings short‑fall rises.
  
• Action: For investors seeking exposure to oil‑price upside with reduced volatility, CTGO offers a “synthetic hedge” play. Consider a long position with a stop near $1.30 to capture upside while limiting downside if the forward curve narrows. Alternatively, a partial‑position hedge (e.g., buying CTGO while holding a small short‑oil position) can further offset residual spot‑price risk.
  

In short, Contango’s forward‑curve hedging has turned oil‑price volatility into a predictable spread‑capture engine, bolstering earnings in the current market. The sustainability of that boost hinges on the persistence of a steep contango curve; a shift in market dynamics would likely translate into a direct impact on the company’s earnings and, consequently, its stock price.