Contango, backwardation and roll yield: why USO lags oil

On any given day there is not one price for crude oil futures but a whole row of them: one for next month's delivery, one for the month after, and so on out for years. Plot those prices against their delivery dates and you get the futures curve, also called the term structure. When later months cost more than nearer ones, the market is in contango. When later months cost less, it is in backwardation.

The shape of that curve matters to anyone who holds futures for longer than one contract's life. A futures position has to be rolled — the expiring contract sold and a later one bought — and each roll either costs money or earns it, depending on the curve. That effect, called roll yield, is why the United States Oil Fund (USO), which holds crude oil futures, finished May 2006 to September 2026 about 73% lower while the spot price of crude rose about 37%. This guide explains the curve, the roll arithmetic, what the USO record shows and what it doesn't, and the April 2020 episode when the front-month price went negative.

The futures curve: contango and backwardation

Every delivery month of a futures contract has its own price, set by trading in that month. The curve connects them.

• Contango is an upward-sloping curve. A buyer of oil for delivery in six months pays more than a buyer for delivery next month.
• Backwardation is a downward-sloping curve. Oil for delivery later is cheaper than oil for delivery now.

Why curves slope the way they do

For a storable commodity, contango has a natural ceiling. Someone who buys oil today and stores it can sell a futures contract for later delivery and lock in the difference. If the later price exceeds today's price by more than the cost of carry — storage, insurance and the interest on the money tied up — that trade is a riskless profit, so traders do it until the gap closes. A curve in contango is therefore often a sign that supplies are ample and storage is filling.

Backwardation has no such ceiling. It shows up when the physical good is scarce right now: users will pay more for oil they can have immediately than for oil next year, and holders of inventory would rather sell into today's market than store. Economists call the benefit of having the physical good on hand the convenience yield. When it is high, near months trade above later ones.

Neither shape is permanent. The same contract can flip between contango and backwardation several times in a few years, and different commodities have different habits: precious metals, which are cheap to store, usually sit in mild contango.

Rolling and roll yield

A futures contract expires, so anyone who wants continuing exposure — a fund, an index, a hedger — must sell the expiring contract and buy a later one before expiry. That is the roll. As a contract approaches expiry its price converges toward the spot price. The roll's cost or benefit comes from where the later contract sits on the curve.

Use the illustrative curves in the figure, and assume the spot price and the curve's shape stay the same all year:

• Contango. The front month is $70.00 and the second month $70.80. The fund sells at $70.00 and buys at $70.80. A month later the contract it bought has become the front month and, with nothing else changed, trades at $70.00. It has lost $0.80 on $70.80, about 1.13%. Repeated monthly for 12 months, that compounds to about −12.7% a year with oil flat.
• Backwardation. The front is $80.00 and the second month $79.10. The fund sells at $80.00 and buys at $79.10, which then rises to $80.00 as it becomes the front month: a gain of $0.90 on $79.10, about 1.14% a month, or about +14.5% over a year, again with no change in spot.

Real curves are rarely that tidy, but the logic holds: a futures holder's return is roughly the change in spot plus roll yield, plus the interest earned on the cash backing the position, minus costs.

The record: USO against spot crude, 2006–2026

USO is an exchange-traded fund that holds crude oil futures rather than oil. According to its sponsor, its benchmark is the near-month WTI contract, rolled into the next month over a five-day window at the start of each month. That makes it a fair real-world test of what rolling does.

Rebased to $100 in May 2006, the monthly average spot price stood at about $137 in September 2026 (from $70.84 to $97.31 a barrel), while USO stood at about $27 (from $541.84 to $145.66 on a split-adjusted basis). The gap did not open evenly. Some windows from the same data:

The pattern fits the roll story. In 2020, the year the EIA describes storage at the delivery point as scarce and expensive, USO lost 62% while the average spot price fell 18%; in 2009 it captured less than a quarter of spot's rise. From mid-2022 to September 2026, USO rose while the average spot price fell, which is the signature of positive roll yield; the figure does not show the curve itself, so treat that as consistent with backwardation rather than proof of it.

Read the numbers carefully

Three cautions apply to this comparison, and they are the reason not to over-read any single row:

• Average versus close. The spot series is a monthly average of daily prices; USO is a month-end close. In a month with a big move, the two can differ by several percent for that reason alone.
• Split adjustment. USO carried out a 1-for-8 reverse split on April 28, 2020, according to its sponsor. Finabase's price history is split-adjusted, which is why USO appears at $541.84 in 2006 — roughly eight times the price it actually traded at then. An unadjusted chart would show a cliff in April 2020 that is not a loss.
• More than roll. USO's price also reflects the interest on the cash and Treasury bills it holds as collateral and the fund's expenses, and its holdings and methods have been described differently over its life. The gap is mostly, not purely, roll yield.

April 2020: when contango broke the floor

The starkest recent case of contango came in April 2020. The US Energy Information Administration reports that on April 20, 2020, the front-month (May) WTI contract traded below zero for the first time since NYMEX crude futures began in 1983, reaching about −$40.32 a barrel. The Congressional Research Service puts the May contract's close that day at about −$37.62, while the June contract closed at $20.43 — a gap of about $58 between two adjacent months. The May contract expired the next day.

EIA's account is a storage story: with demand down sharply and storage at the Cushing, Oklahoma delivery point scarce and expensive, holders of the expiring contract who could not take delivery paid others to take it. This is the cost-of-carry argument at its limit — when there is nowhere to put the oil, carrying it costs more than the oil is worth. Monthly data smooths it away: the EIA's spot average for April 2020 is $16.55, and Finabase's five-year weekly front-month chart begins in November 2021, after the episode.

How to read a curve, and pitfalls

• Check the spread, not just the front month. The difference between the front and second month tells you the next roll's cost or benefit. A headline price rising while the curve deepens into contango can still be a losing month for a futures holder.
• Roll yield is not a forecast. A curve in contango does not say prices will rise, and backwardation does not say they will fall. Futures prices reflect storage, financing and current scarcity as well as expectations.
• Long-only commodity funds are not spot proxies. Over short periods they track the front month closely; over years, roll yield can add or subtract more than the change in spot.
• Different funds roll differently. Some hold several months or choose contracts by rule to soften contango; their results will differ from USO's. Read the prospectus.
• Physical delivery sets the extremes. Contracts that must be settled with real barrels can trade at prices that look impossible when storage runs out.

Contango, backwardation and their neighbours

For the mechanics of each contract, see Futures contracts explained: specs, clearing, expiry and settlement; for how broad-commodity funds handle the same problem, Commodities explained: energy, metals, crops and how to own them.

How Finabase does it

Finabase does not show a futures curve or the price of individual contract months. Its Futures page and symbol pages such as WTI crude, CRUDEOILWTI=F show a continuous front-month price, which splices contracts together at each roll and so does not include roll yield. Futures-based funds trade like stocks and have ordinary symbol pages: the USO chart shows the fund's split-adjusted price history, roll yield included. Putting the two side by side over a few years is the simplest way to see the effect this article describes. The comparison figure here is ours, built from the EIA's monthly spot price and Finabase's USO price history; the curve figure is illustrative.

Frequently asked questions

What is contango in simple terms?

Contango means futures for later delivery cost more than futures for nearer delivery. It usually reflects the cost of storing and financing the commodity, and it makes rolling a long position costly.

What is backwardation?

Backwardation is the opposite: later delivery months are cheaper than the front month, typically when the physical good is scarce now. A long position earns positive roll yield when it rolls in backwardation.

Why did USO lose money when oil prices went up?

Over long stretches, USO's futures rolls cost money because the crude curve was often in contango. From May 2006 to September 2026, $100 in USO became about $27 (price, split-adjusted) while the monthly spot average went from $100 to about $137.

How did oil prices go negative in 2020?

On April 20, 2020, the expiring May WTI contract fell to about −$40 a barrel intraday because holders who could not take delivery found little storage at Cushing and paid others to take their contracts. The June contract still closed at $20.43.

Is roll yield the same as the futures return?

No. A rolled futures position earns roughly the change in spot plus roll yield plus interest on its collateral, minus costs. Roll yield is the part that comes from the curve's shape.

Summary

The futures curve sets out prices for each delivery month: rising in contango, falling in backwardation. Anyone holding futures over time must roll, and each roll in contango sells the cheaper expiring contract and buys a dearer one, while in backwardation the reverse happens. With an illustrative 1.1% monthly slope, that is worth roughly 13–15% a year in either direction with spot unchanged. The USO record shows the cumulative effect: from May 2006 to September 2026 the fund fell about 73% on a split-adjusted price basis while the monthly average spot price rose about 37%, with the gap opening fastest in 2009 and 2020. Read a futures fund's price, not the front-month chart, to know what holding it would have earned.