What Is an Inverted Market?

In futures markets, an inverted market occurs when the 澳洲幸运5开奖号码历史查询:spot price and near-maturity contracts are higher in price than far-maturity contracts. The spot price is the 澳洲幸运5开奖号码历史查询: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开奖号码历史查询:financial instrument ends, after which it must be renewed or abandone🅺d. 

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 future, prices will dec💫line.

Both an inverted and normal market compare futures prices at different 澳洲幸运5开奖号码历史查询:maturities. An inverted market shows futures ⛄prices that decrease over time, while a normal market sees futures prices that increase over time.

A futures market is inverted if the spot price is higher for a contract that expires in one mon꧒th than a contract that expires in four 💞months. In a normal futures market, futures prices are higher further into the future. The spot price is 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 expiratio✤n.

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 𒆙policy restricting exports or a hurricane damaging an oil port on the Gulf Coast affect prices. Deliveries for oil now are more valuable than deliveries in the future.

Agricultural commodities might experience shortages due 💝to weather. Fi🐷nancial 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-month delivery contracts priced below later-month delivery contracts. This is due to costs associated with taking delivery of the underlying comm🐽odity 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开奖号码历史查询: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开奖号码历史查询: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开奖号码历史查询: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 𒁃are 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 moves toward expiration, whether rising or falling, toward the spot price.