Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Backwardation

What it is:

Backwardation describes a downward sloping forward curve in a commodity market. This means that as the price of a commodity for future delivery is lower than the spot price -- the price of a commodity today. 

How it works (Example):

Backwardation starts when the cost of carry – i.e., storage, financing and convenience fees, exceeds the difference between the forward and spot price

This situation usually arises when a commodity that normally experiences contango faces a positive demand or negative supply shock.  When this occurs, short term prices become greater than long term prices because consumers want the commodity immediately, despite the cost to hold the commodity.

Why it Matters:

Backwardation is the opposite of contango. Both effects are important for rational pricing in futures markets, and sometimes present opportunities for investors to arbitrage price discrepancies.  

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...