Definition of backwardation

Backwardation occurs when the price of a spot or near-term contract is higher than the price for forward deliveries. This is applied particularly to commodities, for instance when a supply shortage pushes up spot or near-term prices but the futures price remains steady because larger supplies are expected later.

The reverse situation, when spot prices are lower than futures prices, is called contango. Backwardation is also used in the London stock market to describe the fees and interest charged on delayed settlement of stock futures transactions.

 

backwardation in the news

In December 2013 an FT columnist was writing about signs of increased demand for commodities. The writer pointed to backwardation in the copper futures curve which is generally taken as a sign for real demand for the commodity leading to a current shortage. While temporary and local backwardations are relatively insignificant, the writer pointed out, this time the backwardation stretched out along the futures curve.

Discussion

Lexicon on Twitter