Crude beta

October 24, 2015 11:00 AM

The article, “Is roll yield still a useful concept?” Futures, February 2015, carefully explained that at least historically, “roll yield” has been quite useful as a timing indicator for structural positions in WTI and Brent crude oil futures contracts. Is it possible to further fine-tune such a timing indicator? The answer is, “Yes,” as long as the states-of-the-world that can be inferred from historical data can be expected to be the case going forward, which of course cannot be guaranteed.

There are two fundamental metrics that could be useful for deciding upon crude oil futures positions: whether there are ample inventories or not, and whether spare capacity is at pinch-point levels or not. This article will further argue that a dynamic allocation strategy alone is not sufficient for holding the line against losses in a crude-oil-dominated strategy.
ample inventories and roll-yield

As explained in the February 2015 Futures article, a futures contract’s roll yield is positive when the near-month futures contract trades at a premium to deferred-delivery contracts, forming a curve shape referred to as “backwardation.” Conversely, the roll yield is negative when the near-month futures contract trades at a discount to deferred-delivery contracts, forming a curve shape referred to as “contango.”

When crude inventories have been ample, the front-to-back futures spread has been in contango; and when inventories were scarce, the front-to-back spread has been in backwardation. This is illustrated in “Inventories vs. Contango/backwardation” (below). As argued in the February 2015 Futures article, one should consider only taking long-term positions in oil when inventories are scarce, as indicated by the futures curve shape. 

Page 1 of 3
About the Author

Hilary Till is a principal of Chicago-based Premia Research, which is a consulting firm that designs indices. She is also the co-editor of “Intelligent Commodity Investing.”