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However, investments in these types of derivative instruments bring terms such as contango and backwardation into the equation.
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Charts on Brent crude and WTI futures show clearly defined backwardation.
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Oil futures have been in contango since mid-May, in contrast to their usual state, known as backwardation, where prices continually drop from the current spot price.
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This grim price schedule, exhibiting what the traders call backwardation (futures prices lower than spot), is a pretty powerful incentive for any private owner not to stockpile heating oil.
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Copper has been in backwardation almost constantly since 2003.
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Contango involves a scenario where future prices for a given commodity are higher than spot prices whereas backwardation involves a scenario where future prices for a given commodity are lower than spot prices.
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Brent Crude even went into backwardation, a market structure in which near-term delivery contracts trade at higher prices than longer-termed contracts on fears that supply will be disrupted for an extended amount of time.
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Geopolitical jitters, he explained, had sparked notable backwardation in Brent, which means short-term contracts are trading at a premium to longer-dated ones, a sign that investors are fearful of the future and prefer to buy today.
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Backwardation is the opposite of contango.
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When backwardation happens, the future contracts of a commodity are actually priced lower than the price of the current month contract at the time of sale, and the investor (or ETF) can benefit by selling the current month high and buying the next month lower.
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