Contango, backwardation and the cost of rolling futures

Why the curve slopes

Storage, financing and insurance can make later delivery more expensive. Conversely, having physical inventory immediately available may be valuable enough to put nearby prices above deferred prices. These mechanisms explain a curve shape; they do not determine the direction of tomorrow's commodity price.

A futures contract tends toward the relevant spot settlement price as expiry approaches. When a fund repeatedly maintains exposure through later contracts, this convergence matters. Its return also depends on collateral income, contract selection, trading costs and changes in the entire curve.

Worked example: $70 versus $73

Assume an imaginary commodity has a nearby contract at $70 per unit and the next contract at $73. A trader closes one nearby contract and opens one next contract, each representing 100 units. The $3 spread represents $300 of different contract notional value. Opening a futures contract does not mean paying that full notional amount.

The roll itself is not automatically a $300 realised trading loss. If the new contract later converges from $73 to $70 while spot remains unchanged, the long loses $300 before costs. If it instead rises to $76, the long gains $300. Backwardation can create the opposite convergence effect under otherwise similar assumptions.

A continuous chart is not a rolling return

Do not label the entire futures return a roll yield. Spot movements, changing curve slopes and the roll schedule can dominate the outcome. A back-adjusted continuous chart may remove visible roll gaps and cannot by itself reproduce an investable strategy. Different commodities also have different delivery and settlement rules.

Check which price series you are analysing

When studying an available closed daily, weekly or monthly commodity chart, first establish whether the series represents one dated contract or a continuous construction. Note any published adjustment method. In Student Wyckoff Pro, use the available closed bars to study price structure; obtain the dated futures curve and contract specifications separately before interpreting a rolling return.

Primary sources

Sources explain the mechanics and limitations; the editorial examples use invented numbers rather than market quotations.

• What is Contango and Backwardation

Sources checked: 2026-10-23