Backwardation


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Related to Backwardation: Contango, Normal backwardation theory

Backwardation

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.

Backwardation

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.

backwardation

Backwardation.

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 ?
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.
In short, Opec has achieved its goal of pushing the global oil market into backwardation, a shift that will likely discourage new investment.
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.
When investing in an oil or gas ETF, contango and backwardation are two of the most important terms to understand.
Because backwardation is a performance tailwind, if it is present, the fund that concentrates its assets in the following month's contract should outperform the fund that spreads its assets out.
Backwardation is a market condition in which futures prices is lower than the spot price for a certain commodity.
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.
The spread between April and May Brent widened in backwardation to 97 cents a barrel at Friday's Asia close to reflect a tighter prompt market.
The Dubai swaps backwardation, a market situation where the cost of prompt shipments is greater than that for later supplies, narrowed today.
He added that the backwardation in Brent - where prompt prices are higher than those further along the futures curve - was coming in, which suggested demand for Brent had slipped.
The reverse occurs when the spot price exceeds the futures price and the market is in backwardation.
A sampling of terms defined includes: active premium, aggregation, angel financing, asset allocation, backwardation, benchmark, bridge loan, capital structure arbitrage, coefficient of determination, commodity option, convertible arbitrage, deferred futures, discretionary trading, distressed debt, enumerated agricultural commodities, extrinsic value, follow-on funding, hedge ratio, interdelivery spread, long short equity, modified value-at-risk, offshore fund, piggyback registration, social entrepreneurship, systematic trading, tracking error, underlying futures contract, venture capital method, and weather premium.