How do you profit from backwardation?

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.

Why is backwardation normal?

Normal backwardation is when the futures price is below the expected future spot price. A normal backwardation market is often confused with an inverted futures curve. A futures market is normal if futures prices are higher at longer maturities and inverted if futures prices are lower at distant maturities.

What is a backwardation strategy?

What Is Backwardation? Backwardation is a market condition in which a futures contract that is far from its delivery date trades at a lower price than a contract closer to its delivery date. So, in other words, the spot price—also known as the market price—for the underlying asset is higher than the futures contract.

What does oil backwardation mean?

When oil futures trade at lower levels than spot prices and near-term futures, that’s known as backwardation.

What commodities are in backwardation?

But urgent demand has flipped about half of major commodity markets tracked by the Bloomberg Commodity Index including oil, natural gas, copper, soybeans into backwardation.

What is steep backwardation?

A backwardated curve can mean that oil is in higher demand today than what is expected in the future. In a backwardated, or downward sloping curve, crude oil consumers are willing to pay a higher price in the present than in the future.

What is backwardation in the stock market?

Key Takeaways. 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.

What is an example of backwardation?

This situation is called backwardation. For example, when futures contracts have lower prices than the spot price, traders will sell short the asset at its spot price and buy the futures contracts—for a profit—driving the expected spot price lower over time to converge with the futures price eventually.

What is normal backwardation in futures?

Normal backwardation is when the futures price is below the expected future spot price. This is desirable for speculators who are net long in their positions: they want the futures price to increase. So, normal backwardation is when the futures prices are increasing. Consider a futures contract we purchase today,…

How do traders use backwardation to make profit?

Traders use backwardation to make a profit by selling short at the current price and buying at the lower futures price. The slope of the curve for futures prices is important because the curve is used as a sentiment indicator.