What does backwardation refer to in the commodities market?

Backwardation in the commodities market refers specifically to a situation where the futures delivery price of a commodity is below the expected future spot price. This condition typically arises when there is a strong demand for immediate delivery of the commodity or when there are concerns about future supply.

In essence, backwardation suggests that investors are willing to pay a premium for immediate access to a commodity, thus driving the futures price below what they anticipate the spot price will be at the time of delivery. This scenario can reflect a tight market condition where current supply is limited or where storage costs for holding the commodity are high.

The other options do not accurately describe backwardation. Future prices being above expected future spot prices would indicate contango, which is the opposite of backwardation. Spot prices increasing do not directly relate to the relationship between spot prices and futures prices, and market volatility being low does not inherently indicate the status of future versus spot prices. Thus, option B correctly encapsulates the concept of backwardation in the commodities market.