Roll Yield

A trader who wants continuous exposure to oil can't just buy one futures contract and hold it forever — every contract expires, so staying exposed means selling the expiring one and buying a further-dated one, over and over, a process called rolling. What most newcomers miss is that this rolling itself has a return, independent of whether oil's price rose or fell that month. If the curve is in contango, you're systematically selling cheap and buying expensive every roll. If it's in backwardation, the opposite — and that difference, compounded monthly, can dominate a long-term commodity investor's total return.

Where it comes from

$$\text{roll yield} \approx -\frac{F_{far} - F_{near}}{F_{near}}$$

In words: it's the negative of the percentage slope of the curve between the contract you're selling and the one you're buying. In contango, the far contract is more expensive than the near one, making the slope positive and the roll yield negative — you sell low, buy high, every single roll. In backwardation the far contract is cheaper, flipping the sign: you sell high, buy low, and pocket the difference each time you roll, month after month.

Worked example

A trader holds the near-month contract at $78.00, and the next month out trades at $78.90 — mild contango. Rolling means selling the $78.00 contract and buying the $78.90 one: a roll yield of $-(78.90 - 78.00)/78.00 \approx -1.15\%$ that month, a cost, even if oil's actual spot price doesn't move at all. Now suppose the market flips into backwardation: near-month is $78.00, next month is $76.50. Rolling now means selling high at $78.00 and buying low at $76.50, a roll yield of $+(78.00 - 76.50)/78.00 \approx +1.9\%$ that month — pure profit from the curve shape, again independent of where spot itself is headed.

What this means in practice

Long-only commodity index products roll every month by construction, so their long-run return is spot return plus accumulated roll yield — which is why oil-linked ETFs have sometimes lost money for years even while spot crude was roughly flat, because they held positions through a long contango stretch. Traders distinguish "I think oil goes up" from "I think this curve pays me to hold it" as two separate, sometimes contradictory, views.