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What does Backwardation mean?

A pricing situation in the futures market in which the futures price of a commodity is trading below the spot price or in other words, the spot price is above the futures price. For example, if the spot price of oil is $95 and the futures price is $90 than the market is considered to be in backwardation.

Also known as "Normal Backwardation."

Futures Knowledge Explains Backwardation

Markets that are in normal backwardation where the spot price is higher than the futures are thought to be rewarding the futures buyer as they are taking risk off the producer who now has an established price.

The opposite of a backwardation is contango, where the futures price is higher than the spot price.

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