Backwardation
A futures market where near-term contracts trade at a premium to deferred contracts, generating positive roll yield and signalling near-term supply tightness.
Formula
Backwardation = (Spot Price − Futures Price) / Spot Price × 100%
Backwardation occurs when the spot price or front-month futures trade above deferred contract prices — the opposite of contango. It is a signal of near-term supply tightness or unusually strong immediate demand: physical holders who can deliver now command a premium.
The economic driver is the convenience yield — the benefit of having the physical commodity immediately available outweighs the cost of carry. When the convenience yield exceeds storage and financing costs, the curve inverts into backwardation.
Backwardation is constructive for long futures strategies: rolling contracts means selling the higher-priced near month and buying the cheaper deferred month, generating positive roll yield. Energy markets frequently swing into backwardation during supply disruptions or OPEC-driven production cuts.
Example
Brent crude spot: $92.00/bbl. 1-month futures: $91.20. 3-month futures: $89.50. 6-month futures: $87.00. The market is in backwardation of $5.00 (spot to 6-month). A long futures ETF rolling monthly earns approximately $0.87/month in positive roll yield.
Related Terms
Carry / Cost of Carry
The net cost of holding a physical commodity position — storage, insurance, and financing minus any income or convenience yield.
AdvancedContango
A market structure where futures prices are higher than the current spot price, creating negative roll yield for long futures holders.
AdvancedConvenience Yield
The implicit benefit of holding physical inventory of a commodity rather than a futures contract — what justifies backwardation.
AdvancedFutures Curve
The graph of futures prices across successive delivery months for a commodity, revealing whether the market is in contango or backwardation.
IntermediateInventory Draw
A week-over-week decline in reported commodity stockpiles — typically bullish for price as it signals consumption outpacing supply.
IntermediateNatural Gas
A hydrocarbon energy commodity priced in $/MMBtu on NYMEX, known for extreme seasonal volatility driven by heating and cooling demand.
IntermediateRoll Yield
The gain or loss generated when rolling a futures position from an expiring contract into the next one, driven entirely by the shape of the futures curve.
AdvancedSpot Price
The current market price at which a commodity can be bought or sold for immediate delivery.
BeginnerSpot-Futures Basis
The difference between the spot price and a futures price for the same commodity — the numerical expression of carry, storage, and convenience yield.
Intermediate