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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.


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.



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.

References in periodicals archive ?
This switch from backwardation to contango indicated ample inventories relative to demand in the spot markets.
A contango market is often confused with being normal, just because it has been prevalent more recently; but in fact contango is rarer than the backwardation.
Between 1984 and 2004, the average difference between first-month and third-month US crude futures was 41 cents per barrel backwardation.
Things have calmed down a little since then but the backwardation is still there, valued at $18.
The buying "increased backwardation and the prompt market is heating up," said Ehsan Ul Haq, a senior analyst at KBC Energy in Walton-on-Thames, England.
Nonetheless, the recent trend toward a narrowing backwardation remains intact, signaling the market is no longer prepared to pay a high premium for prompt cargoes.
Nevertheless, with ample supplies in Chinese stockpiles, the shortage may be reflected more in a persistent backwardation on the LME rather than significantly higher copper prices.
So if backwardation is starting to disappear it suggests a lack of demand for actual crude.
Key Atlantic Basin products are now in backwardationFor all the hype about the WTI crude oil market potentially moving into backwardation later in the year, European ICE gasoil and NYMEX RBOB gasoline markets in the Atlantic Basin have quietly started to price in a premium for immediate delivery.
Futures for the leading global indices and the RTS index are within deep backwardation.
The movement of passive investors into commodities shifted markets from backwardation to contango, the condition that occurs when futures prices exceed cash prices.
Rifkin of OmniSource said the copper market's pricing and backwardation shows "the market is screaming for that material to come to the market today.