What are we talking about?
The term structure of futures prices is upward sloping when futures prices are above the spot price, due to the cost of carrying, which includes storage, insurance, and cost of capital. Backwardation is the opposite; it’s when near-term futures trade above far-term futures, due to weak supply conditions and high convenience yield for near-term delivery. Roll yield is the extra return or roll down that occurs when you roll forward expiring contracts: positive during backwardation (when you sell high and buy low) and negative during contango (when you buy high and sell low). These mechanics often push divergences of spot price movements and actual returns in futures linked vehicles.
When does it take place?
In climates where there is plenty of supply and little immediate demand, contango dominates. It’s also when things are normal. Backwardation surfaces in times of shortages, geopolitical tensions, bad weather or significant seasonality, which creates a greater sense of urgency in the short term. A common symptom of roll yield is overhauls in the periodic roll of contracts, especially in ETF structures, as market participants adjust exposures to changing fundamentals.
Can this continue?
Indeed. In structurally oversupplied regimes, where there are ongoing storage surpluses, contango can last for months or even years. Backwardation can persist for a few weeks to months during extended periods of tightness before supply reactions to higher prices occur. The same is true for the roll yield effects, which are still present according to the curve configuration, but are mitigated by the arbitrage and convergence forces over time.
Has there been a similar event in the past?
These are phenomena which are recurrent in commodity markets. During normal times, when demand is lower than supply, energy complexes are in contango; when they are in a state of shock, they switch to backwardation, and natural gas has been particularly volatile from year to year. Roll yield has always been a key factor in institutional portfolios and hedging programmes.
Which industries is this applicable?
The framework is mainly used industry-wise and most applicable to energy (crude oil, natural gas, refined products), base and precious metals, and agriculture (grains and soft commodities). It provides information to strategic decisions for commodity producers, refiners, airlines, manufacturers and commodity allocators using futures and commodity ETFs.
What’s the current market status?
The oil market has significantly calmed from its previous backwardation, which was set up by tension in the Middle East and disruption of the Strait of Hormuz, as of late June 2026. Short-term WTI futures are currently hovering in the $70–72 per barrel range as the market seems to have taken a breather on supply worries and is anticipating normalization, as the curve flattens from an all-time high with near-month barrels up to $40 above December 2026. That change has muted the prospects for positive roll yields which some futures investors enjoyed earlier this year. Typical seasonal trends towards the summer are keeping natural gas futures unchanged at around $3.30/MMBtu, as fundamentals continue to balance. Sophisticated traders should remain attentive to real-time curves within CME Group, as any resurgence of geopolitical tensions could quickly bring backwardation and roll benefits back into it.
Be the first to comment