What is Backwardation in economics?

Backwardation refers to When a commodity is valued more highly in a spot market (that is, when it is for delivery today) than in a futures market (for delivery at some point in the future).
Normally, interest costs mean that futures prices are higher than spot prices, unless the markets expect the price of the commodity to fall over time, perhaps because there is a temporary bottleneck in supply. When spot prices are lower than futures prices it is known as contango.

  • Backwardation is when the current price of an underlying asset is higher than prices trading in the futures market.

  • Backwardation can occur as a result of a higher demand for an asset currently than the contracts maturing in the coming months through the futures market.

  • Traders use backwardation to make a profit by selling short at the current price and buying at the lower futures price.