Futures Basis

The price difference between the spot cash market price of a commodity or security and its corresponding futures contract price.

Futures basis represents the price difference between the current cash (spot) market price of an asset and the price of its corresponding futures contract. It reflects the cost of carry, which includes storage costs, interest rates, insurance, dividends, and localized supply and demand dynamics between the present moment and the contract's delivery date. Under normal market conditions for storable commodities, the futures price is typically higher than the spot price to account for these holding costs, resulting in a negative basis. This market structure is known as contango. Conversely, when immediate supply is tight, the spot price can rise above the futures price, creating a positive basis. This structure is known as backwardation. Investors, hedgers, and cross-asset traders monitor the basis closely because it determines the pricing efficiency of hedges. If the basis changes unexpectedly before a hedge is closed out, the investor faces basis risk. As a futures contract approaches its expiration date, the basis naturally converges toward zero because the spot and futures markets merge at delivery.

If spot West Texas Intermediate (WTI) crude oil is trading at $75.00 per barrel and the front-month futures contract is priced at $77.50 per barrel, the futures basis is calculated as $75.00 - $77.50 = -$2.50 per barrel.