Definition
Backwardation describes a futures market in which contracts for later delivery are priced below nearer-dated contracts or the spot price. The futures curve then slopes downward as maturity lengthens.
How it works
It often appears when the physical good is scarce today and buyers pay up for immediate supply, or when holding stock has a high convenience value. Shortages, supply disruptions and low inventories are common causes, though the exact reasons differ by market.
If the curve keeps its shape and spot is unchanged, a long futures position tends to gain as the contract converges up toward spot, giving a positive roll return when rolling into cheaper later contracts. That is only one component: if spot falls enough, losses can exceed the roll gain, so backwardation is not a prediction that prices will rise.
Formula / convention
Approximate roll return per roll (long position) = (expiring contract price − next contract price) ÷ expiring contract price; backwardation makes it positive
Illustrative example
Illustrative: a fictional commodity's expiring contract trades at 100.00 and the next contract at 98.00. Rolling a long position means selling at 100.00 and buying at 98.00, a roll return of (100.00 − 98.00) ÷ 100.00 = +2.0%. If the whole curve then falls 5.0%, the approximate combined result is −5.0% + 2.0% = −3.0%, so a positive roll return did not prevent a loss.
What to watch for
Backwardation is a snapshot of the current curve, not a signal that prices will rise or that long futures positions will profit. Curves can flatten or flip into contango quickly, and futures-based products still face fees, margin requirements and tracking differences.