https://www.investopedia.com/terms/b/backwardation.asp
Backwardation is when the current price, or spot price, of an underlying asset is higher than prices trading in the futures market.
The slope of the curve for futures prices is important because the curve is used as a sentiment indicator. The expected price of the underlying asset is always changing, in addition to the price of the future's contract, based on fundamentals, trading positioning, and supply and demand.
The spot price is a term that describes the current market price for an asset or investment, such as a security, commodity, or a currency. The spot price is the price at which the asset can be bought or sold currently and will change throughout a day or over time due to supply and demand forces.
Should a futures contract strike price be lower than today's spot price, it means there is the expectation that the current price is too high and the expected spot price will eventually fall in the future. This situation is called backwardation.
For example, when futures contracts have lower prices than the spot price, traders will sell short the asset at its spot price and buy the futures contracts for a profit. This drives the expected spot price lower over time until it eventually converges with the futures price.
For traders and investors, lower futures prices or backwardation is a signal that the current price is too high. As a result, they expect the spot price will eventually fall as the expiration dates of the futures contracts approaches.
Backwardation is sometimes confused with an inverted futures curve. In essence, a futures market expects higher prices at longer maturities and lower prices as you move closer to the present day when you converge at the present spot price. The opposite of backwardation is contango, where the futures contract price is higher than the expected price at some future expiration.
Backwardation can occur as a result of a higher demand for an asset currently than the contracts maturing in the future through the futures market. The primary cause of backwardation in the commodities' futures market is a shortage of the commodity in the spot market. Manipulation of supply is common in the crude oil market. For example, some countries attempt to keep oil prices at high levels to boost their revenues. Traders that find themselves on the losing end of this manipulation and can incur significant losses.
Since the futures contract price is below the current spot price, investors who are net long on the commodity benefit from the increase in futures prices over time, as the futures price and spot price converge. Additionally, a futures market experiencing backwardation is beneficial to speculators and short-term traders who wish to gain from arbitrage.
However, investors can lose money from backwardation if futures prices continue to fall, and the expected spot price does not change due to market events or a recession. Also, investors trading backwardation due to a commodity shortage can see their positions change rapidly if new suppliers come online and ramp up production.