Backwardation meaning

In commodities and derivatives practice, backwardation describes a market condition where the current (spot) price of an asset is higher than the price for delivery at a future date of the same asset (contrary to the usual expectation). It produces a downward‑sloping forward or futures curve and is the opposite of contango. This is a descriptive market term, not generally defined in UK or Irish legislation or case law, but widely used in commodity sale contracts, energy and metals trading, securities lending, and derivatives documentation (including ISDA Master Agreements). It often reflects near‑term scarcity, delivery premia or high convenience yield. Legal significance includes pricing and risk allocation in indexed supply agreements, drafting of pricing formulas, margin and collateral calls under cleared and bilateral derivatives, and valuation on early termination or close‑out (for example, determining Market Quotation or Loss under ISDA). It is also relevant to quantifying cover and expectation losses for failure to deliver or wrongful termination, and to expert evidence on mitigation and causation in disputes. Usage and meaning are broadly consistent across England and Wales, Scotland, Northern Ireland and Ireland. Related term: contango (where forward prices exceed spot prices).