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.
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.
On the desk
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.