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Commodity

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Price

Contract Maturity

Backwardation

Sell

Buy

Sell

Buy

Contango

NEGATIVE
ROLL YIELD

POSITIVE
ROLL YIELD

Upward sloping Futures Curve

repeately buy at a higher price
than a selling price

Downward sloping Futures Curve

repeately buy at a cheaper price than
a selling price

Spot Market

“Contango” is the process whereby near-month futures are cheaper than those expiring further into the future, creating an upward sloping curve for futures prices over time (i.e. Futures Price > Spot Price at contract maturity). In a contango environment, an investor who is long futures may experience “negative roll yield” if the contract is rolled after the futures price moves downward to converge with the expected spot price. Even if the commodity appreciates, the investor holding long futures may experience a loss.

 

“Backwardation” is opposite of contango, when near-month futures are more expensive than those expiring further into the future (i.e. Future Price < Spot Price at contract maturity). In a backwardation environment, an investor who is long futures may experience “positive roll yield” if the contract is rolled after the futures price rises to converge with the expected spot price. Even if the commodity appreciates, the investor holding long futures mayexperience no loss.

 

WTI crude oil has at times in the past traded in contango due to material storage costs of oil, as well as high demand of crude oil. Because roll yields are considered in the calculation of the Index, the presence of contango in the commodity markets could result in negative “roll yields”, which could adversely affect the level of the Index.