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Cotton, Crude, and Gasoline Face Falling Prices


Backwardation, when near-month futures are more expensive than those expiring later, creates a downward sloping curve from prices over time and can suggest a coming drop in value. Cotton, crude, and gasoline are all in backwardation.

Backwardation is the process where near-month futures are more expensive than those expiring later in time, which creates a downward sloping curve for prices over time. It is a natural occurrence in the commodity world, but it's still a phenomenon that traders need to be aware of. Often, a falling futures curve could mean that the market expects the commodity to take a drop in value or that it is currently overpriced.

As such, being cognizant of futures patterns can be a big help to traders everywhere. Below, we outline three commodities currently exhibiting a stretch of backwardation:
  • Cotton Dragging: The fluffy commodity is well known for its volatility as it can hurdle in either direction with little warning. This, of course, make it a trader's delight as it opens the door for profit opportunities. Currently, NYMEX cotton futures are backwardated through December 2014. Investors looking to make a play on cotton can utilize said futures (trading ticker TT) or the Dow Jones-UBS Cotton Total Return Sub-Index ETN (NYSEARCA:BAL), which invests in cotton futures.
  • Crude Looks Bleak: Both WTI and Brent crude are experiencing a prolonged period of backwardation. While this futures curve is par for the course as far as Brent is concerned, WTI is not quite as familiar with such a lengthy stretch of falling prices. Increased production and a rising prevalence of natural gas is likely a major cause. WTI is backwardated through December 2021 and Brent through May 2019. WTI futures trade under the ticker CL while Brent holds the BB title. Investors can also utilize the United States Oil Fund LP (NYSEARCA:USO) and the United States Brent Oil Fund LP (NYSEARCA:BNO) for WTI and Brent, respectively.
  • Gasoline Following Suit: Crude prices do not always translate perfectly to that of RBOB gasoline, but in this case the latter is taking cues from the former. RBOB futures, trading under the ticker RB, are sitting in backwardation through February 2014. At that point, the futures enter into cyclical periods based on seasonality, but the cheapest contract currently trading falls in January 2016. Traders can use the United States Gasoline Fund LP (NYSEARCA:UGA) if they wish to avoid personally dealing with futures exchanges.
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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
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