Web Trader MT5
When the futures price sits below the spot price. That’s it, really, though the implications are interesting.
Most commodity markets default to contango, where futures trade above spot because storing physical commodity costs money. Backwardation flips that. It usually shows up when buyers desperately need the physical thing right now and aren’t willing to wait three months for it. Tight supply. Fear about future production. Geopolitical panic.
For traders, backwardation matters because of roll yield. If you’re long futures and the curve is in backwardation, you make money just from holding; your contract converges upward toward spot as it approaches expiry. Contango eats your returns the same way, in reverse.
Example: Brent crude went into deep backwardation in mid-2022 after Russia invaded Ukraine. Front-month contracts traded near $120, six-month contracts closer to $100. The market was screaming “give me oil today, I don’t trust the future.” Refiners paid the premium because they had to.
