What does Narrow Basis mean?
A situation in futures markets when the spot price is close to the futures price of the same underlying commodity. The gap between the spot price and the futures price becomes narrow.
Futures Knowledge Explains Narrow Basis
While spot price is the current price of a commodity for present delivery, in a futures contract, the price is specified for delivery at a future date. Normally the futures price is higher, as it involves carrying costs. The difference between the spot price and the futures price depends on many factors including future outlook for the commodity. In a situation when commodity price starts falling, the wide gap shrinks into narrow gap. It may also result into negative. The narrow gap is generally a temporary phenomenon as economics of supply and demand readjusts market price. A wide basis also becomes a narrow basis the closer a futures contract comes to maturity because uncertainty reduces.