back month priced lower than front?

Discussion in 'Index Futures' started by auspiv, Aug 13, 2008.

  1. auspiv


    what is it called when the back month is priced lower than the front? i know it happens sometimes in index futures, but right now i'm observing it in crude futures. in a nut shell, what causes this?
  2. gobar


    hurricane like the one knows as Katrina :D
  3. auspiv


    so sorry, i meant lower. my original post is now corrected.
  4. It's called backwardation and typically implies a shortage of the commodity in the near term as compared to the contracts further out the curve. The opposite is contango and it implies more of a supply constraint further out the curve...this is also called a normal market due to the cost of carry.

    NYMEX locals tend to trade spreads very actively as opposed to flat price, so what you are seeing in the spreads may be more of a technical move than implying a shortage of crude in the near term, which we don't really have. Note the U/V is backwardated but the V/X is still contango.
  5. jwecme


    Backwardation is when further out contracts are cheaper than front/spot.

    Contango is when futher out contracts are more expensive.
  6. tr51


    in grain mkts it's called an inverse
    in oil mkts its called backwardation