We have already discussed how roll yield can negatively affect the overall return of a commodity holding The impact of contango or backwardation can be relatively large compared to the overall return. Petroleum has unfortunately been in the news lately. Nevertheless, Crude Oil performance last year gave us a good illustration of the impact that contango/backwardation can have.
CRUDE OIL – 2009
Crude Oil’s had a fantastic year in 2009. The spot price bottomed around 35 and topped 80 to finish on a near +100% performance. Many would assume that quick and easy way to double their money was to invest in Crude Oil in 2009 (assuming you could time the top and bottom perfectly). This is without counting the strong effect of contango that would have eaten into the return.
This can be illustrated by the fact that the USO ETF – supposed to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil – did not manage to emulate the levels of performance seen in the Crude Oil spot price in 2009. A mere +34% performance over 2009 pales in comparison with spot price performance. This is, of course, because the ETF managers invest in Crude Oil futures and are subject to the same contango, which eats into their returns.
Here is the charts of examples for Crude Oil in 2009....
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