Why does long-dated commodity exposure quietly bleed away?
Contracts expire; exposure does not have to. To hold a commodity position for a year you must roll — repeatedly close the expiring contract and open the next one. The price difference between those two contracts is not administrative detail. Over long horizons it is frequently the dominant term in your result.
The mechanics of one roll
Take the contango curve: the front month is at $80.00 into expiry, the next month trades at $81.50.
- Sell the front contract at $80.00 — closing the old position
- Buy the next contract at $81.50 — opening the new one
No profit or loss is realised by the roll itself; you closed at market and opened at market. But your exposure now carries a higher entry price in a market whose spot price is still $80.00. You are $1.50 behind before anything at all has happened.
Now do it again next month with spot still at $80.00. The contract you bought at $81.50 converges to $80.00 as it becomes the front month, so you sell it at $80.00 — −$1.50 × 1,000 = −$1,500 realised per contract — and you roll into $81.50 again.
The arithmetic across a year
- Roll cost per month, holding the front-to-next spread at $1.50 every month: $1.50 on an $80 price = 1.875%
- Twelve months, spot unchanged: (1 − 0.01875)¹² ≈ 0.80
- You finish the year roughly 20% down with the commodity's price exactly where it started
That is negative roll yield, and it is the most misunderstood fact in commodity investing. It explains how a crude-tracking or natural-gas-tracking product can fall 60% or more across a decade while the commodity itself is roughly flat. Nothing was mismanaged. The fund paid carry, every month, exactly as the contracts required.
The sign flips in backwardation
Same market, backwardated: front $80.00, next month $78.50.
- Sell the front at $80.00, buy the deferred at $78.50 — you rolled into a cheaper contract
- As it converges up toward spot you gain $1.50: +1.875% per month
- Twelve months, spot unchanged: (1 + 0.01875)¹² ≈ 1.25 → roughly +25%
Same commodity. Same completely unchanged spot price. A 45-percentage-point swing in outcome, produced entirely by curve shape. This is why professionals discuss commodity curves at least as much as commodity prices, and why "I think oil goes up" is an incomplete thought.
Total return, decomposed
A futures-based commodity position's return has three parts:
- Spot return — the commodity's actual price change.
- Roll yield — the curve's contribution: negative in contango, positive in backwardation.
- Collateral return — interest earned on the cash backing the position, since margin is collateral and the rest of the cash sits somewhere earning a rate.
Look at part 1 alone and you will be permanently baffled by your own results.
Reading products honestly
Any instrument offering "exposure to oil" without owning barrels is rolling futures on your behalf. Some hold the front month; some spread across several months; some select the month with the least punishing roll. These design choices produce dramatically different long-run outcomes from identical spot moves, which means the roll methodology is the product.
So the paragraph naming the roll rule is the paragraph to find first, ahead of the fee table and well ahead of the performance chart. Describing how these products work is not a recommendation to own any of them.
In the data
Roll shows up as a divergence between two lines that track the same commodity. Below are five years of the crude oil front-month price and of USO, a fund that holds near-dated crude futures and rolls them forward as they approach expiry.
Over years the two separate, and neither chart says why: there is no roll cost, no roll date and no contract month anywhere on them. The fund's published roll rule tells you what it did; any split of the gap into price change and roll effect is an estimate you make, not a figure you read.
Try it now
Measure both charts above from the same starting date and write the two total returns side by side.
Subtract. The gap is roll yield plus fees, and the fee half is a rounding error next to it.
Check the commodity's curve shape over that period. An exchange settlement page shows only today's curve; the history is in the US Energy Information Administration's public "NYMEX Futures Prices" table (eia.gov, Petroleum & Other Liquids), which gives Cushing crude contracts 1 to 4 day by day. It stops on 5 April 2024, so it covers most of the five years, not all of them. Contract 4 above contract 1 is contango. Does the sign of the gap match the sign of the roll? It should — and now you know why.