Term Structure: Contango vs Backwardation
The spot price of a commodity is only half the story. The shape of the futures curve dictates whether long-term holders bleed capital or earn a premium through roll yield.
Future prices are higher than spot prices.
This reflects the "cost of carry"—storage, insurance, and financing costs to hold the physical commodity until delivery. Roll Yield is Negative.
Future prices are lower than spot prices.
This indicates an immediate supply shortage. Buyers are willing to pay a "convenience yield" premium to have the physical commodity right now. Roll Yield is Positive.
The ETF Roll Yield Trap
Retail investors frequently buy commodity ETFs (like USO for oil or UNG for natural gas) expecting them to track the spot price perfectly. They don't.
Because ETFs must avoid taking physical delivery of millions of barrels of oil, they mechanically sell the expiring front-month contract and buy the next month. In a steep contango market, they are constantly selling low and buying high. This structural bleed is known as negative roll yield.
Historical Example: WTI Super Contango (April 2020)
In April 2020, lack of storage caused the expiring May WTI contract to trade at -$37/bbl. However, the June contract was still trading around $20/bbl. An ETF forced to roll positions from May to June suffered catastrophic losses attempting to bridge a $57 spread, effectively wiping out retail capital even though oil prices eventually recovered.
Frequently Asked Questions
Does Contango mean prices will go up?
No. The forward curve is not a price prediction. It purely reflects the cost of carry (interest rates + storage costs) in an adequately supplied market.
How can I avoid roll decay?
By trading spot CFDs (though you pay daily financing), investing directly in physical metals, or holding equities of commodity producers rather than futures-backed ETFs.