Narrow Basis

Don't blame your jeans. A narrow basis is the real reason you can’t keep your pants up without a belt.

In the commodities market, people keep an eye on the difference between the spot market and the futures market. The spot market relates to purchases you are making now. You need 100 barrels of oil delivered this afternoon...you buy them on the spot market.

The futures market refers to contracts with delivery dates down the road. You have a contract to purchase 100 barrels of oil at $75, expiring in July. The transaction isn't set to take place until July, three months from now. That transaction (and the $75 price) takes place in the futures market.

If prices for the spot market and futures market get close, meaning there's not much difference between the two, that’s known as a narrow basis. So if the spot market for oil is $74.95 and the July futures price is $75...that's a narrow basis.

That situation suggests a market with a lot of visibility and stability. Investors are essentially betting that supply and demand trends are likely to stay the same in the foreseeable future. Prices now are fundamentally the same as they are expected to be in the future.