Backwardation
A futures market condition where the spot price exceeds the futures price, reflecting immediate supply tightness.
What is Backwardation?
Backwardation is a market condition in commodity or futures markets where the current spot price of an asset is higher than its futures price for later delivery. It typically occurs when there is an immediate supply shortage, high convenience yield from holding the physical asset, or strong near-term demand. Backwardation benefits holders of physical inventory and is contrasted with contango.
Example
Example
During a sudden oil supply disruption, the spot price for crude oil spikes to $95/barrel while six-month futures trade at $88. This backwardation reflects the premium markets place on immediate delivery of the scarce physical commodity.