The usual spread between prices tells us that forward prices are higher than current prices. This situation, referred to as \u2018contango\u2019 is quite typical, due to a variety of factors such as inflation, insurance, storage and the investor\u2019s psychology.<\/p>\n
However, forward prices may fall below current market prices either on a short-term basis or for a sustained period. When this happens, investors refer to \u2018backwardation\u2019, which might occur when there has been, or there is expected to be, a shortage of the product in the near-term, yet production is widely expected to resume in the coming weeks and months.<\/p>\n
Backwardation gets right to the very heart of imminent supply and demand.<\/p>\n
Now, at this point, you may be wondering why your next-door neighbor invests in corn or crude oil, and yet you haven\u2019t seen their backyard crammed with stalks of corn or flooded in petroleum.<\/p>\n
This is primarily because investors in the futures market are able to transact, and take positions in, and yet never actually own the commodity or product that they invest in.<\/p>\n
At the same time, the liquid nature of most futures markets makes it a viable environment for producers to offset risk and ultimately transact physical delivery.<\/p>\n","protected":false},"excerpt":{"rendered":"
Explanation of Futures Prices: Contango & Backwardation.<\/p>\n","protected":false},"author":850,"featured_media":203614,"parent":0,"comment_status":"open","ping_status":"closed","template":"","meta":{"_acf_changed":false,"footnotes":""},"contributors-categories":[149],"traders-academy":[100,103,105],"class_list":{"0":"post-9172","1":"trading-lessons","2":"type-trading-lessons","3":"status-publish","4":"has-post-thumbnail","6":"contributors-categories-interactive-brokers","7":"traders-academy-beginner-trading","8":"traders-academy-level","9":"traders-academy-trading-lesson"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"\n