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Financial Definition of BACKWARDATION
What It Is
How It Works
Backwardation starts when the cost of carry – i.e., storage, financing and convenience fees, exceeds the difference between the forward and spot price.
This situation usually arises when a commodity that normally experiences contango faces a positive demand or negative supply shock. When this occurs, short term prices become greater than long term prices because consumers want the commodity immediately, despite the cost to hold the commodity.
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