Backwardation

Backwardation is a market condition in commodity futures where the spot price (current price for immediate delivery) is higher than the futures price for delivery at a later date. It is the opposite of contango. Backwardation typically occurs when there is a current shortage or high immediate demand for a commodity, causing the spot price to be bid up above the forward curve. For commodity traders, backwardation signals near-term supply tightness and creates a positive roll yield—investors rolling expiring futures into cheaper next-month contracts effectively buy low and sell high. Crude oil and agricultural commodities frequently exhibit backwardation during supply disruptions.