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  • John Pickart

Crude Roll Yield

The turmoil (pun intended) in the crude oil markets this week suggests it's time for a review of futures markets. The roll yield causes a misunderstanding regarding returns. The chart illustrates the roll yield using current prices (April 22) in NYMEX WTI futures. Investors (ETFs, ETNs, individuals, etc.) typically buy near term futures (point A, June contract) at $15.15. However, spot price is $10.50. Over time, as the June contract nears expiration, the price converges toward the spot price (arrow B). If the spot price has not changed, losses are realized. Then, to maintain exposure, the investor must sell the June contract and buy the July contract (point C). If the curve hasn't changed, the July contract price likely fell from $21.15 to near point A. But, if spot prices still haven't changed, additional losses will occur as the rolling process repeats. Simplistically, it's buying high and selling low. So, spot prices would need to rise dramatically just to offset the negative roll yield. In fact, the upward slope of the curve (contango) is very steep currently. There are periods historically where the curve has been downward sloping (backwardation); in this case, the roll yield is positive.


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