Backwardation

Backwardation is a futures pricing term.  A commodity pricing structure is considered to be in backwardation if as the commodity future contract reaches expiration the next corresponding similar commodity future will have its trading price set at a lower trading price than the preceding commodity future.

In other words the rolling price of the contract is lower with future contracts than it was in the past contracts.  The implication is that the commodity’s spot price will be cheaper in the future than it has been in the past. When a commodity futures contract is set to go into Backwardation, the short contract holder would be most profitable by delivering the contract as far in the future as he can.