Backwardation definition

A state in which the price of a futures contract is lower than the eventual or expected spot price of the underlying commodity or security.

In the futures market, a situation in which the price of the nearest, or active contract, is higher than the price of contracts further in the future. Typically, prices increase as the delivery months extend into the future. Backwardation occurs because, as a commodity or financial instrument is held for a longer period of time, it carries charges (such as storage charges), interest expenses, and insurance that have to be paid. Backwardation occurs only in unusual circumstances. A current shortage of product is one situation in which backwardation occurs.