Backwardation is the process by which futures contracts decrease in price as they move further out in maturity. This can often be due to the expectation of future prices or trends in a certain hard asset, but it can also occur from supply boosts, among other things. Though it is not a phenomenon that should worry investors, keeping an eye on the futures curve can help you make more informed investment decisions [for more commodity news and analysis subscribe to our free newsletter].
Below, we outline four of the most popular commodities that are currently exhibiting backwardation:
- WTI Crude: West Texas Intermediate crude futures are currently sitting in backwardation through the December 2022 contract, as far out as its futures are offered. This is somewhat of a more recent development, as prior years have seen crude typically exhibit contango (rising prices) as the storage costs for barrels of oil is usually high. As supply increases and alternative fuels pick up steam, this may be the new norm for this energy asset.
- RBOB Gasoline: With WTI in backwardation, it should come as no surprise to also see gasoline futures behave in the same manner. RBOB gasoline futures are currently backwardated through the February 2015 contract.
- Brent Crude: Brent is most popular and plentiful in the east, and is the standard quote for many powerhouse countries across the world. Like WTI, Brent typically exhibits contango due to storage costs, but it too has entered a period of elongated backwardation, with contracts decreasing all the way out to December 2019 – as far out as they are offered.
- Cotton: Breaking up the list of energy contracts is this popular soft commodity. Cotton is well known for its volatility, which has made it a popular outlet for traders seeking lucrative returns. Contracts for this fluffy asset are backwardated through March 2016 – as far out as they are offered.
Disclosure: No positions at time of writing.