What Is an Inverted Market?

In futures markets, an inverted market occurs when the 澳洲幸运5官方开奖结果体彩网:spot price and near-maturity contracts are higher in price than far-maturity contracts. The spot price is the 澳洲幸运5官方开奖结果体彩网:current price at which an asset can be bought or sold. Maturity is the date on which the life of the transaction or 澳洲幸运5官方开奖结果体彩网:financial instrument ends, after which it mu🙈st be renewed or abandoned. 

Understanding Inverted Markets

An inverted market may arise for various reasons, including a short-term supply decrease, causing current prices to rise. If demand is expected to fall in the futur𝐆e, prices will decline.

Both an inverted and normal market compare futures prices at different 澳洲幸运5官方开奖结果体彩网:maturities. An inverted marﷺket shows futures prices that decrease over time, while a normal market sees futures price🃏s that increase over time.

A futures market is inverted if the spot price is higher for a contract that expires in one month than a contract that expires in four months. In a normal futures market, futures prices are higher further into the future. The spot price ꦦis below the price of a contract expiring in one month, which is below a contract expiring in four months.

Contango and Backwardation

Backwardation and contango refer to how a futures contract moves toward the spot ꦺprice as it moves closer 💮to expiration.

If the futures price is falling to meet the spot price, the market is in contango. If the futures price is rising to meet the spot price, this is normal backwardation. A futures curve will be inverted if the spot price is higher now than in the future. Inversion and backwardation are commonly seen together.

Commodities in Inverted Markets

The most common reason a market inverts is due to short-term disruptions in the supply of the underlying commodity. For crude oil futures, OPEC policy restricting exports or a hurricane damaging an oil port on the Gulf Coast affect pric🃏es🐟. Deliveries for oil now are more valuable than deliveries in the future.

Agricultural commodities might experience shortages due to weat🌳her. Financial futures might see short-term price squeezes due to changes in trade policy, taxes, or interest rates.

Carrying Costs

Normal or non-inverted markets show near-mo𒅌nth delivery contracts priced below later-month delivery contracts. This is due to costs associated with taking delivery of the underlying commodity now and holding it, or carrying it, until a later date.

Carrying costs include interest, insurance, and storage. They also include 澳洲幸运5官方开奖结果体彩网:opportunity costs as money tied up in the commodity cannot earn interest capital gains elsewhere. When the cost of a futures contract equals the spot price plus the full cost of carry, that market is said to be in 澳洲幸运5官方开奖结果体彩网:full carry.

Inverted Market Example

Since 2020, some commodity futures have been consistently inverted. In March 2023, 74% of the index weight of 澳洲幸运5官方开奖结果体彩网:S&P GSCI components traded at higher prices for one-month delivery than one year. Brent Crude futures have been in "super backwardation" since 2022. Corn, soybeans, sugar, and Kansas wheat are experiencing the same phenomena.

The Bottom Line

An inverted market occurs when near-term maturity futures contracts are priced higher than those in the future. Disruptions in the supply of the underlying commodity usually cause an inverted market. Contango and backwardation describe how a futures contract price m🐈oves toward expiꦡration, whether rising or falling, toward the spot price.