Contango & Backwardation
When futures trade above or below spot — and the market mood each one signals.
These two intimidating words simply name which way the futures price sits relative to spot. They describe the shape of the “futures curve” (prices across different expiries) and often carry a hint of market mood.
- ContangoWhen futures prices are higher than the spot price. — futures trade above spot (the normal state, driven by cost of carry). The curve slopes upward across later expiries.
- BackwardationWhen futures prices are below the spot price. — futures trade below spot. The curve slopes downward — an abnormal state that signals something specific is going on.
ContangoWhen futures prices are higher than the spot price. is normal (just cost of carry), so it’s not very informative — but *backwardationWhen futures prices are below the spot price. is a signal, because it means the market is willing to pay more for the asset today than for deliveryBuying shares to hold in your demat beyond the day. later*. That’s unusual and tells you something: either there’s urgent demand / a supply squeeze right now (common in commoditiesA raw material (gold, oil, copper) traded on exchanges.), or, in equityA unit of ownership in a company. indexA basket of stocks tracked together to represent a market. futures, often bearish positioning — heavy short hedgingTaking an offsetting position to reduce risk. pushing futures below spot. When the normal carry relationship inverts, ask why: the market is revealing fearThe two emotions that move markets and ruin accounts., scarcity, or strong demand for immediacy. BackwardationWhen futures prices are below the spot price. is the futures curve raising its hand.
ExampleCrude oilThe energy commodity that moves economies — and India imports most of it. in a supply crisis: buyers desperate for barrels now bid spot above the futures price — steep backwardationWhen futures prices are below the spot price., signalling acute near-term scarcity. Conversely, in calm markets oilThe energy commodity that moves economies — and India imports most of it. futures sit above spot (contangoWhen futures prices are higher than the spot price.) reflecting storage and financing costs — boring and normal.
Key takeawayContangoWhen futures prices are higher than the spot price. = futures above spot (normal, just cost of carry); backwardationWhen futures prices are below the spot price. = futures below spot (abnormal, a signal). BackwardationWhen futures prices are below the spot price. flags urgent demand/supply squeeze, or in indexA basket of stocks tracked together to represent a market. futures often bearish hedgingTaking an offsetting position to reduce risk. — when carry inverts, the market is telling you something.
FAQs
Does backwardation always mean prices will fall?
No — it reflects *current* demand/supply and positioning, not a guaranteed future move. In commodities it usually signals near-term scarcity; in index futures it can reflect heavy hedging or a high-dividend period. Treat it as context about positioning and sentiment, not a standalone directional prediction.