Why does a long position bleed when the price goes nowhere?
Because convergence charges you the spread you rolled into, every single month, and it does not care what spot did. Here is the whole thing laid out period by period.
The setup
Hold these fixed for twelve months so the mechanism is visible on its own:
- Spot stays at $80.00 the entire year. It never moves.
- The curve is in constant contango: on every roll day, the expiring contract has converged to $80.00 and the next contract trades at $81.50.
- You roll monthly. One contract is 1,000 barrels, so the notional is $80,000.
Each cycle is identical: buy at $81.50, watch convergence pull it to $80.00, sell, repeat.
Table A — a fixed one-contract position
| Roll | Bought at | Sold a month later at | Per barrel | Per contract | Cumulative |
|---|---|---|---|---|---|
| 1 | 81.50 | 80.00 | −1.50 | −1,500 | −1,500 |
| 2 | 81.50 | 80.00 | −1.50 | −1,500 | −3,000 |
| 3 | 81.50 | 80.00 | −1.50 | −1,500 | −4,500 |
| 4 | 81.50 | 80.00 | −1.50 | −1,500 | −6,000 |
| 5 | 81.50 | 80.00 | −1.50 | −1,500 | −7,500 |
| 6 | 81.50 | 80.00 | −1.50 | −1,500 | −9,000 |
| 7 | 81.50 | 80.00 | −1.50 | −1,500 | −10,500 |
| 8 | 81.50 | 80.00 | −1.50 | −1,500 | −12,000 |
| 9 | 81.50 | 80.00 | −1.50 | −1,500 | −13,500 |
| 10 | 81.50 | 80.00 | −1.50 | −1,500 | −15,000 |
| 11 | 81.50 | 80.00 | −1.50 | −1,500 | −16,500 |
| 12 | 81.50 | 80.00 | −1.50 | −1,500 | −18,000 |
Twelve months later, spot is $80.00 — exactly where it started, to the cent. The position has lost $18,000, which is 22.5% of the starting notional.
Nothing went wrong. No fee was charged, no mistake was made, no forecast failed. The commodity did nothing, and the position paid twelve months of storage economics to people who own tanks.
Table B — a fund, which resizes to its assets
A tracker does not hold a fixed number of contracts. It holds contracts in proportion to its assets, so as the fund shrinks, so does the dollar cost of each roll. The loss becomes multiplicative, not linear.
The correct per-period return is measured against the capital committed — the entry price:
(80.00 − 81.50) ÷ 81.50 = −1.84% a month
(Divide by what you actually paid: measuring against spot gives −1.88% instead, and the gap widens as spreads widen.)
Starting the index at 100.00:
| Month | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| Level | 98.16 | 96.35 | 94.58 | 92.84 | 91.13 | 89.45 |
| Month | 7 | 8 | 9 | 10 | 11 | 12 |
|---|---|---|---|---|---|---|
| Level | 87.81 | 86.19 | 84.60 | 83.05 | 81.52 | 80.02 |
Check it directly: (1 − 0.0184)¹² ≈ 0.800. The fund finishes the year at −20.0% with the commodity's spot price unchanged.
Note that the compounding version loses less (−20.0% against −22.5%): as the position shrinks, so does each roll in dollars. Geometric decay is gentler than linear decay of a constant size.
Now flip the curve
Same commodity, same flat $80.00 spot, but backwardated: on each roll day the next contract trades at $78.50.
(80.00 − 78.50) ÷ 78.50 = +1.91% a month → (1.0191)¹² ≈ 1.255
| Month | 3 | 6 | 9 | 12 |
|---|---|---|---|---|
| Level | 105.84 | 112.03 | 118.57 | 125.49 |
+25.5%, from a commodity that did not move.
A 45-percentage-point swing in a year, produced entirely by curve shape. This is why professionals talk about commodity curves at least as much as commodity prices, and why "I think oil goes up" is an incomplete sentence rather than a view.
What roll return actually is
It is not a fee and it is not money vanishing. It is a transfer. In contango the long is paying somebody — the storage owner running cash-and-carry, the producer hedging output — to bear the cost of holding physical inventory. In backwardation the flow reverses: the long is paid to supply a market that is short.
The honest name for negative roll return is the storage bill, passed through to you.
Table A also runs for a short. A merchant long a tank of oil and short the front month against it buys back at $80.00 and sells the next month at $81.50 on every roll, and collects the $1.50 the long paid: the cash-and-carry income of Unit 1, arriving month by month. The dangerous case is the other way round. A supplier that has sold fixed-price years out and hedges with a stack of long front-month contracts has the same roll with no inventory behind it; when backwardation flips to contango the stack pays the spread on every contract, in cash, through variation margin, while the forward sale pays nothing until delivery. Metallgesellschaft's US subsidiary lost about $1.5 billion that way in 1993 (Culp and Miller, Journal of Applied Corporate Finance, 1995).
A caveat: real curves change shape continuously, so realised roll returns are lumpy. The constant-spread tables isolate the mechanism; they do not describe any real twelve months.
Try it now
- Rebuild Table B with a $1.00 monthly spread on an $80 commodity — entry $81.00, converging to $80.00 — and confirm you get roughly −13.8% over twelve months. Then try $2.50 and watch it pass −30%.
- The commodity itself and a futures-based fund on it are below, over the longest window this page holds. Measure each from the same starting date to today and write the two total returns side by side.
- Subtract. The gap is roll return plus fees, and it is far larger than any fee schedule can account for — which is the whole point of Table B. The next lesson takes that gap apart.