What is backwardation
Backwardation is a market state in which the price of a futures contract is lower than the current spot price of the same asset.
A futures contract is an agreement to buy or sell an asset at a set price on a later date. The spot price is the price for delivery now. In backwardation, the market pays more for the asset today than for the same asset delivered later.
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Worked example (hypothetical)
Take an imaginary crude oil market:
| Contract | Price relative to spot |
|---|---|
| Spot (delivery now) | Reference price |
| Nearest futures month | Slightly below spot |
| Later futures month | Further below spot |
| Furthest listed month | Lowest on the curve |
If you plot these prices from the nearest to the furthest expiry, the line slopes downward. That downward slope is backwardation.
As each contract approaches its expiry date, its price tends to move towards the spot price. In a backwardated market this means a futures price usually rises towards spot over time, if the spot price stays where it is. Spot prices rarely stay still, so this is not a reliable gain.
Backwardation vs contango
| Backwardation | Contango | |
|---|---|---|
| Futures vs spot | Futures below spot | Futures above spot |
| Curve shape | Slopes down | Slopes up |
| Typical cause | Tight current supply, strong demand now | Ample supply, storage and financing costs |
| Effect of rolling a long position | Sell the expiring contract high, buy the next one cheaper | Sell the expiring contract low, buy the next one dearer |
See contango for the opposite case and futures roll for how positions move from one contract month to the next.
Precise definition and edge cases
For experienced readers:
- Formal definition. For an asset with spot price S and a futures price F for expiry T, the market is in backwardation when F is below S, or when futures for later expiries are priced below those for nearer expiries.
- Cost-of-carry view. In theory, futures should trade above spot by the cost of storage and financing. Backwardation appears when the convenience yield (the benefit of holding the physical asset now) is larger than those costs.
- Normal backwardation. In Keynes's usage, the term means the futures price is below the expected future spot price, not the current spot. This is a different idea and cannot be read directly from a price screen.
- Partial curves. A curve can be backwardated at the front and in contango further out, or the reverse. News reports often refer only to the spread between the front month and the next contract.
- Forex. Currency forwards are priced by interest rate differentials (forward points, covered interest parity), so the term is rarely used there.
Where you see the term
- Energy and metals news: reports that "the oil curve is in backwardation" usually signal tight near-term supply. See energies and metals.
- Exchange term-structure charts: prices across expiry months shown as a curve.
- CFD platforms: CFDs that track futures are moved to a new contract month at rollover. The size and direction of any price adjustment depend on the curve shape. Check the specific instrument's conditions with your provider.
Leveraged CFD and futures trading can lose money fast. A curve's shape does not predict where prices will go.
Related terms
Contango · Futures roll · Forward contract · Derivatives · Commodity · Cash vs physical settlement · Trading glossary
Frequently asked questions
What does backwardation mean in simple words?
It means the asset costs more for delivery now than for delivery later, so futures trade below spot.
Is backwardation bullish?
It shows strong demand for the asset now. It does not forecast the future price direction.
What is the difference between backwardation and contango?
In backwardation, futures are below spot and the curve slopes down. In contango, futures are above spot and the curve slopes up.
Can a market switch from backwardation to contango?
Yes. Curve shape changes when supply, demand, storage costs or interest rates change.