Business, Legal & Accounting Glossary
Backwardation is a market condition where spot prices exceed forward prices. Contango is the opposite condition, where forward prices exceed spot prices. The terms are most commonly used in oil markets but are also applied in certain commodities and energies markets. In oil markets, the prevailing condition may reflect immediate supply and demand. If crude oil is contango, it may indicate immediately available supply. Backwardation can indicate an immediate shortage. Anything that threatens the steady flow of oil around the world, such as imminent war, tends to drive the oil market into backwardation.
Backwardation refers to a situation that can arise in the futures market.
It refers to a situation when the price of a futures contract is lower than its spot price. It can also refer to a price that is farther in the future being less than a price that is nearer in the future.
If there was a curve showing the value of a contract over time, in the case of backwardation it would be sloping downwards. In theory, this would suggest that prices are expected to decline over the life of the contract(s).
Contango refers to the opposite situation when a future price is higher than the spot price.
Traders will say that the forward curve is ‘in backwardation’, or sometimes that it is ‘backwardated’.
The term ‘backwardization’ or ‘backwardisation’ is sometimes used, but it is generally considered to be incorrect.
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This glossary post was last updated: 16th April, 2020 | 3 Views.