Backwardation

When a buyer and seller agree a futures contract for the delivery of an asset at some agreed date in the future, the price agreed will often be higher than the current price. This will be because the seller has to cover the costs of storage insurance and financing, and this situation is known as 'contango'.

The reverse of contango is called 'backwardation'. This is where the current price of an asset goes higher than the future price. This may be because of short term supply issues. For example, in the middle of winter the spot price of heating oil maybe higher than the futures price of heating oil in six months time, simply because demand has increased at that point in time. As the seasons move towards summer and demand for heating oil falls, the contango relationship is restored.

What to do if you need more help

If you need more help with your specific commercial loan, mortgage or insurance requirement please speak to a professional financial adviser.

We hope you found this information useful.

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