Backwardation Report: A Mixed Bag

Last week, we gave investors our first contango report for 2014, noting that precious metals are facing upward curves for the foreseeable future. This week, we’re bringing you the first backwardation report of the year. For those unfamiliar with this term, backwardation is the process whereby near month futures are more expensive than those expiring further into the future, creating a downward sloping curve for future prices over time – put simply, it’s the opposite of contango [for more commodity news and analysis subscribe to our free newsletter].

Backwardation can often occur due to market expectations of which way a commodity’s price will move. On many occasions a commodity will fall into backwardation if it has had a large and rapid run-up, especially grains and softs that are at the mercy of inclement weather. Below, we outline four major commodities that are facing falling futures curves as we settle into 2014.

  • Brent Crude: Brent is currently looking at backwardation through its December 2019 contract, as far out as its futures are offered. Keep in mind that Brent is mainly produced in the Middle East, where tensions have been high for the last few years. Any kind of unrest in that area could give Brent a short-term spike.
  • CopperCopper: Copper has been hit hard since the 2008 financial crisis and it looks like the market thinks there will be more pain to come. Copper is backwardated through its December 2018 contract, as far out as its futures are offered [see also 13 Ways To Invest In Copper].
  • Soybeans: Though it may not seem like it, soybeans are actually among the most frequently traded futures on the CME, keeping pace with the likes of gold and corn. Contracts for this commodity are backwardated through November of this year.
  • WTI Crude: West Texas Intermediate is the oil of the Western world and is more frequently traded in the U.S. than Brent. WTI contracts are also backwardated through the December 2022 offering. This result is especially intriguing given that the high storage cost associated with oil often leads to this fossil fuel falling into a contango pattern. As global production continues to pick up and natural gas gains prevalence, it seems that the market is expecting crude oil to become less of a juggernaut as the years progress.

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Disclosure: No positions at time of writing.

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