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Related to Backwardation: Contango, Normal backwardation theory


A market condition in which futures prices are lower in the distant delivery months than in the nearest delivery month. This may occur when the costs of storing the product until eventual delivery are effectively subtracted from the price today. The opposite of contango.
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In Keynesian economics, a theory stating that the future spot price for a commodity will be higher than the forward price. This is because the producers of commodities expect to sell no matter what and are willing to sell at a loss, if necessary. In normal backwardation, no rational investor will buy on the future spot market if he/she can buy more cheaply on the forward market. The extent to which normal backwardation occurs in the market is debated.
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Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.


If the price of a futures contract that expires in the near term is higher than the price of a contract with the same terms that expires at a later date, the relationship between the two is called backwardation.

More typically, the contract with the longer-term expiration commands a higher price. That relationship is called contango.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
Asian refiners are increasingly finding reasons to cut their exposure to Middle Eastern crude in the second half of 2019 amid prolonged backwardation in the Dubai benchmark price structure and the latest tanker fire incident in the Gulf of Oman.
These production concerns resulted in a "backwardation" in six-month Brent crude futures surging to the highest level in over five years at $3.31 in May, breaching the 2018 peak of $3.
Brent was also in backwardation, hitting its highest front-month premium in three weeks.
Backwardation, in which a futures contract trades below the commodity's expected spot price at the contract's maturity, is an indicator of a tight market.
The Brent crude futures structure has flipped into backwardation for the first time in two-and-a-half years, mimicking the shift in the US crude futures market last week.
Backwardation -- When the future price is less than the spot price
KUWAIT, April 26 (KUNA) -- Oil prices are expected to slip from a state of "contango", a situation where future price is higher than the spot price, into a phase of "backwardation", where the future price is below the spot price, an oil analyst foreboded Tuesday.
In fact, Brent front month timespreads have already strengthened in the last three months and could briefly flip into backwardation this summer.
In short, we will get up close and personal with contango and backwardation, and evaluate the effect each has on this type of security.
The paper examines the impact of oil price volatility, the behavior of the Organization of Petroleum Exporting Countries (OPEC), and the volatility of the US Dollar exchange rate on the backwardation of crude oil futures during 1995 and 2006.
The premium for prompt cargoes, a market structure known as backwardation, influences the level at which Middle East exporters including Saudi Arabian Oil Co set official monthly prices for buyers in Asia, according to industry consultants KBC Energy Economics and JBC Energy.
If the later-dated contracts are less expensive than the contracts held by the fund, then the commodity market is in 'backwardation', which may add to performance.