Where to roll?

[Mr Doe]

Suppose you are long front dated physical futures contract and the expiration day is near. Contracts are in a contango - lets say a steep(ish) curve; and you want to roll the contract forward, i.e. sell the front and buy the backdated one. My question is; which one do you choose?
I realize there is a tradeoff between the the impact of the spot or the front contract to the far ones, and the negative yield in a steep curve incurred while rolling it, but I have no clue when I should be rolling it, or which ones should I choose? Is there any reasonable and well-know way to do it? Many thanks.

 

[bob]

If the commodity you're interested in is part of the GSCI, then you might look at how they roll that index....

http://www2.goldmansachs.com/services/securities/products/sp-gsci-commodity-index/roll-period.html

...and plan accordingly, if you know what I mean.

 

[Mr Doe]

Thank you. Yes, their timing is a valuable information.

A couple of links got me to DB, JPM pages where they mention optimal yield roll etc., but there's no mention how they do it. Is this usually a highly secretive info (not the timing, but where on the curve do they roll)?

 

[bob]

Hadn't looked at that, but it appears that the OY indexes out there rebalance according to the contract over the next 13 months that maximizes backwardation / minimizes contango.

I'm no commodities trader, but I would think that means the contracts you wind up long are going to reflect seasonality to a large degree. They also only rebalance once a year to match the policy allocations, so I'd expect such an index to:
(1) show good returns in cases where a seasonality trough shifts locations, but
(2) be very sensitive to demand level in peak months, which if it softens could really hurt the trough months with oversupply, and finally
(3) be, at times, much overweight certain commodities relative to policy, making it fairly important to know at any given time what the actual constituents of the index are.

But perhaps someone on the board with more commodity experience will correct me.