Backwardation

Backwardation is a term used in futures markets to describe a downward-sloping term structure, in which near-term futures contracts are priced higher than contracts with longer maturities. The front-month price exceeds prices for futures several months out. This condition is the opposite of contango, where longer-dated contracts carry higher prices.

Backwardation can arise when there is a premium on holding the physical commodity now—known as a convenience yield—due to expected shortages, sudden demand spikes, or supply disruptions. If storage is costly or risky, market participants may prefer immediate delivery or nearer-term contracts. Market expectations that prices will fall in the future, or seasonal demand patterns, can also contribute. The shape of the forward curve reflects the balance of carrying costs, financing, inventory levels, and these convenience-related factors.

From an investment perspective, backwardation yields a positive roll yield for long positions in futures, because rolling from a high-priced near-month to a lower-priced farther month generates profits. Conversely, contango tends to produce a negative roll yield. Backwardation is often observed in energy markets (for example crude oil), as well as in metals and some agricultural commodities during periods of near-term supply tightness.

Notable drivers include inventory levels, geopolitical events, and seasonality. While backwardation can signal near-term scarcity or demand strength and may offer favorable roll returns, futures curves are dynamic and subject to rapid change as new information becomes available.