should a futures contract strike price be lower than today s spot price it means there is the expectation that the current price is too high and the expected spot price will eventually fall in the future this situation is called backwardation 
for example when futures contracts have lower prices than the spot price traders will sell short the asset at its spot price and buy the futures contracts for a profit this drives the expected spot price lower over time until it eventually converges with the futures price for traders and investors lower futures prices or backwardation is a signal that the current price is too high as a result they expect the spot price will eventually fall as the expiration dates of the futures contracts approaches backwardation is sometimes confused with an inverted futures curve in essence a futures market expects higher prices at longer maturities and lower prices as you move closer to the present day when you converge at the present spot price the opposite of backwardation is contango where the futures contract price is higher than the expected price at some future expiration backwardation can occur as a result of a higher demand for an asset currently than the contracts maturing in the future through the futures market the primary cause of backwardation in the commodities futures market is a shortage of the commodity in the spot market manipulation of supply is common in the crude oil market for example some countries attempt to keep oil prices at high levels to boost their revenues traders that find themselves on the losing end of this manipulation and can incur significant losses since the futures contract price is below the current spot price investors who are net long on the commodity benefit from the increase in futures prices over time as the futures price and spot price converge additionally a futures market experiencing backwardation is beneficial to speculators and short term traders who wish to gain from arbitrage however investors can lose money from backwardation if futures prices continue to fall and the expected spot price does not change due to market events or a recession also investors trading backwardation due to a commodity shortage can see their positions change rapidly if new suppliers come online and ramp up production futures basicsfutures contracts are financial contracts that obligate a buyer to purchase an underlying asset and a seller to sell an asset at a preset date in the future a futures price is the price of an asset s futures contract that matures and settles in the future for example a december futures contract matures in december futures allow investors to lock in a price by either buying or selling the underlying security or commodity futures have expiration dates and preset prices these contracts allow investors to take delivery of the underlying asset at maturity or offset the contract with a trade the net difference between the purchase and sale prices would be cash settled backwardation can be beneficial to speculators and short term traders wishing to gain from arbitrage backwardation can be used as a leading indicator signaling that spot prices will fall in the future investors can lose money from backwardation if futures prices continue to move lower trading backwardation due to a commodity shortage can lead to losses if new suppliers come online to boost production backwardation vs contangoif prices are higher with each successive maturity date in the futures market it s described as an upward sloping forward curve this upward slope known as contango is the opposite of backwardation another name for this upward sloping forward curve is forwardation in contango the price of the november futures contract is higher than october s which is higher than july s and so on under normal market conditions it makes sense that prices of futures contracts increase the farther the maturity date since they include investment costs such as carrying costs or storage costs for a commodity 