Backwardation

Backwardation describes a forward curve structure where prompt crude oil or refined product futures trade at higher prices than contracts for later delivery. It usually signals a tight physical market: inventories are low, supply disruptions may be happening, or refiners urgently need near-term barrels. In a backwardated market, it is unattractive to hold stocks because future prices are lower than today, so the market incentivises drawing tanks rather than storing. Traders watch the shape of the curve and the strength of nearby time spreads to judge how tight the prompt market really is. Backwardation also affects hedging and valuation: inventories marked against forward prices may look less valuable, and roll yield changes for positions held across expiry. For physical traders, strong backwardation can encourage selling prompt cargoes, delaying purchases, or optimising refinery runs to capture the premium for nearby barrels. Understanding backwardation is essential for timing hedges, structuring storage deals, and reading signals about underlying supply–demand balance in the energy market.