Backwardation and contango are two phenomena that define the futures industry of the commodity world. Though the terms have come handcuffed with a negative connotation, those who understand how they work should not sweat their existence. Backwardation is the process by which near month futures are more expensive than those expiring further into the future, creating a downward sloping curve for future prices over time. Contango, simply, has the opposite impact [for more commodity news and analysis subscribe to our free newsletter].
While neither phenomenon is something to worry about, being aware of which commodities are behaving in which ways can allow traders to execute more educated positions. Below, we outline three commodities that are currently sitting in hefty backwardation to help traders adjust their positions accordingly.
Soybeans, believe it or not, are the fifth most popular commodity contract of any offered on the CME group. Though many are likely farmers hedging their crops, the volume of over 3 million contracts traded each month suggests that there is high interest from retail investors as well. Soybeans currently sit in backwardation from now until November 2013. From there it has a few months of bouncing back in forth, but prices fall into another backwardation period from the July 2014 contract all the way out to the November 2016 contract, as far out as futures are currently offered [see also All About the Soybean ETF (SOYB)].
WTI Expected to Dip
Despite crude making some positive headway in recent weeks, it seems that the market is expecting prices to take a dip. Starting in August of this year, contracts will be backwardated through December of 2021, as far out as the futures are offered. As the economy continues to march to new highs, investors will keeping a close eye on crude prices. Also playing into the expected drop is the increased prevalence of natural gas and other energy sources that look to one day displace some of the U.S.’s addiction to crude.
Brent Following Close Behind
The more popular form of crude also sits in backwardation, as its prices face a drop from the current contracts all the way out to December 2019 – as far out as the futures are offered. It should be noted that Brent has been faced with backwardation for a very long time, so this pattern should be nothing new to most. Brent has been up slightly in 2013, but it has dropped more than 5% in the trailing year [see also Crude Oil Guide: Brent Vs. WTI, What’s The Difference?].
Disclosure: No positions at time of writing.