Lexicon

Backwardation

In future contracts for storable goods, e.g. Nickel, the difference between the future price e.g. 3 months, and the cash price is usually positive. A constellation is however feasible where this difference can be negative, i.e. the cash price for the product, such as Nickel, is higher than the futures price. This can happen especially when it is advantageous to hold a certain product in stock. If for example there was a large sudden demand for a product, then the cost of storage and insurance would be outweighed by the value of this sought after product. This is a backwardation.