Backwardation
More like retardation (lolz).
Backwardation is a market condition where the current spot price of an asset is higher than its price for future delivery. This is the opposite of contango, and it typically signals strong current demand or a temporary supply shortage. In a backwardated market, future contracts trade at a discount to the spot price.
Causes of backwardation
- High current demand: When current demand is high, the spot price of a commodity is pushed up, creating a premium over future prices.
- Supply constraints: A current shortage of a commodity, due to factors like production issues or transportation problems, can lead to backwardation.
- Seasonal factors: Backwardation can occur with seasonal commodities, such as heating oil in winter, as a result of increased demand.
- Market expectations: Traders may expect the price to fall in the future, or they may be willing to accept a lower price for a future contract to secure a guaranteed price.
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