Backwardation

The inverted curve where spot beats futures, signaling scarcity and rewarding long rolls.

Overview

In backwardation the front month costs more than deferred months: users bid up barrels available now, paying a premium for immediacy called convenience yield. The shape rewards holders of physical and long futures rolls, each month selling high and reentering lower, the roll yield that carried commodity index returns through the scarcity years of the 2000s. Persistent inversion marks tight markets, low inventories, and squeeze potential, which is why London metals traders watch the cash to three month spread as the fear gauge of physical tightness. Keynes argued a normal market pays speculators this premium for bearing risk.