<p>Backwardation, in the context of commodities trading, refers to a market situation where the futures price of a commodity is lower than its spot price. This is the opposite of <a href="/NewSite/encyclopedia/contango/" class="ency-link">contango</a>, where the futures price is higher than the spot price.</p>

<h2>How It Works</h2>
<p>Backwardation occurs when the demand for immediate delivery of a commodity is low, or when the supply is high. This can lead to a situation where market participants are willing to pay a premium to take delivery of the commodity now rather than later. As a result, the spot price can be higher than the futures price. This dynamic can also be influenced by storage costs, interest rates, and other market factors.</p>

<h2>Why It Matters</h2>
<p>Backwardation can have significant implications for traders and investors. For those who are short on a commodity, backwardation can provide an opportunity to buy at a lower price in the future. Conversely, those who are long on a commodity may face higher costs if they need to roll over their positions. Additionally, backwardation can indicate a potential shift in market sentiment, which could signal a change in the direction of prices.</p>