SKILL.md
Commodities
Core Concepts
Spot vs Futures Pricing
The futures price is related to the spot price through the cost-of-carry model:
F = S × e^((r + u - y) × t)
where S = spot price, r = risk-free rate, u = storage cost, y = convenience yield, t = time to expiration. The convenience yield represents the benefit of holding the physical commodity (e.g., avoiding production shutdowns).
Contango
When F > S, the futures curve is upward-sloping. Storage costs and financing costs exceed the convenience yield. Contango creates negative roll yield because investors must sell cheaper expiring contracts and buy more expensive later contracts. Contango is common in well-supplied markets and for storable commodities like oil and natural gas.
Backwardation
When F < S, the futures curve is downward-sloping. The convenience yield exceeds storage and financing costs, often due to near-term supply scarcity. Backwardation creates positive roll yield because investors sell expensive expiring contracts and buy cheaper later contracts. Backwardation is common in tight supply environments.
Sources of Commodity Return
Total commodity return has three components: