# Backwardation > Backwardation is when later futures trade below nearer ones or spot. Learn the causes, convenience yield, positive roll yield and what it signals about supply. Source: https://learn.tradelabsai.com/futures/backwardation/ Track: Futures · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Backwardation", https://learn.tradelabsai.com/futures/backwardation/ Backwardation describes a futures market where prices for later delivery are lower than prices for nearer delivery, and usually lower than spot. A crude oil curve in backwardation might show $85 for next month, $83 for the month after and $78 a year out. It typically appears when supplies are tight and buyers will pay a premium to have the commodity now rather than later. For long term futures holders, backwardation is favourable, because rolling positions earns a positive roll yield. ## Why backwardation happens According to the cost of carry, futures should trade above spot by financing and storage costs. Backwardation occurs when the benefit of holding the physical asset now, its convenience yield, outweighs those costs. See [Spot vs Futures](https://learn.tradelabsai.com/futures/spot-vs-futures/). | Cause | Example | |---|---| | Low inventories | Refiners need crude now; few barrels in storage | | Supply disruptions | War, sanctions, weather, strikes | | Strong current demand | Seasonal peaks, such as heating demand in winter | | Asset income | Index futures when dividend yields exceed interest rates | | Expected future supply growth | New production coming online later | ## Convenience yield Physical holders of a commodity can use it, sell it into shortages or keep operations running. When inventories are low, that option is valuable, and the convenience yield rises. Futures buyers do not get this benefit, so futures trade below spot. Economists including Nicholas Kaldor and Holbrook Working developed the theory of storage linking inventories and the shape of the curve. See [Storage and Inventories](https://learn.tradelabsai.com/commodities/storage-and-inventories/). ## Normal backwardation Economist John Maynard Keynes proposed "normal backwardation": producers who want to hedge sell futures and must offer speculators a discount to take the other side. In this view, futures prices tend to sit below expected future spot prices, rewarding long speculators on average. Evidence for this risk premium is mixed and varies by market and period. ## Backwardation and rolling When the curve is backwardated, a long futures holder rolls from an expiring contract into a cheaper later one. If spot stays flat, the later contract rises towards spot as it approaches expiry, producing a gain. This is positive roll yield. See [Roll Yield](https://learn.tradelabsai.com/futures/roll-yield/). **Example: Positive roll yield** Front month crude trades at $85 and the second month at $84. A long holder rolls each month. If spot stays at $85, each new contract bought at $84 drifts up to $85 by expiry: a gain of about 1.2% per month, roughly 14% a year, from the curve shape alone. In 2022, after Russia's invasion of Ukraine, energy futures were in steep backwardation, and long commodity indices earned strong roll returns in addition to price gains. See [Crude Oil](https://learn.tradelabsai.com/commodities/crude-oil/). ## What backwardation signals - **Tight supply now:** traders watch the spread between the first and second months as a real time measure of physical tightness. - **Expected relief later:** the market expects supply to improve or demand to fall. - **Short squeeze risk:** in extreme backwardation near expiry, shorts who must deliver can face sharp price spikes. ## Backwardation in other markets - **VIX futures:** move into backwardation during market panics, when spot VIX jumps above futures. See [The VIX](https://learn.tradelabsai.com/volatility/the-vix/). - **Equity index futures:** can trade below spot when dividend yields exceed interest rates. - **Crypto futures:** occasionally trade below spot in sharp selloffs, when leveraged longs are forced out. See [Crypto Futures and Basis](https://learn.tradelabsai.com/crypto/crypto-futures-and-basis/). ## Trading backwardation - **Long commodity positions** benefit from positive roll yield. - **Calendar spreads:** buying near months and selling later months profits if backwardation steepens. See [Calendar Spreads in Futures](https://learn.tradelabsai.com/futures/calendar-spreads-in-futures/). - **Curve signals:** some systematic strategies buy commodities in backwardation and sell those in contango, a form of carry trading. See [Carry Factor](https://learn.tradelabsai.com/research/carry-factor/). ## Common mistakes - **Treating backwardation as a forecast of falling prices.** It mainly reflects current tightness and carry. - **Ignoring squeeze risk** on short positions near expiry in tight markets. - **Assuming backwardation will persist.** Curves can flip quickly when supply returns. ## Frequently asked questions ### What is backwardation? A market condition where futures prices for later delivery are lower than for nearer delivery or the spot price. ### What causes backwardation? Usually tight current supply and low inventories, which raise the value of holding the physical commodity now, known as convenience yield. ### Is backwardation good for investors? For investors holding long futures and rolling them, backwardation is favourable because it produces positive roll yield. Next, learn how traders move positions between contract months in [Rolling Futures Contracts](https://learn.tradelabsai.com/futures/rolling-futures-contracts/). ## Continue learning - Next lesson: [Rolling Futures Contracts](https://learn.tradelabsai.com/futures/rolling-futures-contracts/) - Previous lesson: [Contango](https://learn.tradelabsai.com/futures/contango/) - Related: [Contango](https://learn.tradelabsai.com/futures/contango/): Contango is when later futures trade above nearer ones or spot. Learn why it happens, how it erodes long commodity and VIX funds, and how traders use it. - Related: [Roll Yield](https://learn.tradelabsai.com/futures/roll-yield/): Roll yield is the return from futures converging toward spot as they near expiry. Learn how contango and backwardation drive it and how to estimate it. - Related: [Storage and Inventories](https://learn.tradelabsai.com/commodities/storage-and-inventories/): Inventories are the buffer between commodity supply and demand. Learn the theory of storage, how stocks affect prices and curves, and the key inventory reports. - Related: [Spot vs Futures](https://learn.tradelabsai.com/futures/spot-vs-futures/): Spot is the price for immediate delivery; futures price delivery later. Learn the cost of carry formula, why futures trade above or below spot and convergence. - Related: [Crude Oil](https://learn.tradelabsai.com/commodities/crude-oil/): Crude oil is the world's most traded commodity. Learn WTI vs Brent, the futures contracts, OPEC+, shale, inventory reports and how traders approach oil.