Backwardation

In backwardation, the futures curve slopes downward: the price to receive a commodity today is higher than the price for delivery months from now. This is the opposite of the more common contango structure. Economists often read backwardation as a sign that the market is short of the physical commodity right now — buyers are willing to pay a premium to get it immediately rather than wait.

Suppose natural gas is trading at $4 per MMBtu (million British thermal units, the standard energy measure) on the spot market, but the six-month futures contract is priced at $3.60. That downward slope tells market participants that the current squeeze is expected to ease over time — perhaps because more supply is coming, or seasonal demand will fall. Our natural gas guide covers how seasonal demand swings regularly push this market into backwardation during winter.

Backwardation also has an important implication for investors who hold futures rather than physical commodities. When a market is in backwardation, rolling an expiring contract into the next month means buying the replacement contract at a lower price — a positive roll yield. This is the mechanical flip side of contango's drag. A common misconception is equating backwardation with a falling price forecast; it describes the current curve shape, not a directional prediction. Learn more about spot vs. futures prices to see how these two numbers diverge in practice.