What is meant by the term "backwardation" in commodity markets?

Backwardation is a market condition often observed in commodity markets where the spot price—what you would pay for immediate delivery of the commodity—is higher than the futures price, which is the agreed-upon price for future delivery of that commodity. This situation typically indicates that there is a current high demand for the commodity or a short-term supply shortage, causing buyers to pay a premium for immediate access over waiting for future contracts.

In this context, backwardation can signal that market participants expect prices to decline over time, suggesting that as delivery dates approach, the futures prices will decrease to converge with the higher spot price. This scenario is common in markets for perishable goods or those subject to seasonal demand fluctuations.

The other options present different market conditions that either represent contango situations (where futures prices are higher than spot prices) or lack the specificity regarding pricing mechanics that characterize backwardation. Understanding these distinctions can help participants make more informed trading and investment decisions.