The rapid surge in oil prices unleashed by conflict in the Middle East is jolting one of the most popular systematic strategies touted by big banks on Wall Street.
The trade, known as commodity curve carry, goes short on near-dated futures for raw materials and long on contracts expiring later. The idea is to easily profit from the tendency of longer-dated futures to trade at a higher price to account for the costs of storage and transportation.
Curve carry is the main commodity trade that banks package into quantitative investment strategies, or QIS. These are swap-based products that mimic popular systematic approaches, providing hedge funds, pensions and other large institutions easy access to complex exposures. QIS ran $133.8 billion in commodities as of June, with a little less than half in long-short strategies, a survey of 14 broker-dealers by Albourne Partners shows.
With the US and Israel's war against Iran disrupting oil supplies and sending the price of near-term crude contracts surging, commodity curve carry had its worst week ever in early March, according to a UBS Group AG index going back to 2007. It posted a record jump on Tuesday on hopes the conflict might be short-lived and as major economies debated releasing oil from their stockpiles, but with few signs of an end to the hostilities it has since resumed losses.
In trading jargon, the price curve of oil is now firmly in backwardation, with April contracts for WTI trading about $5 above June futures. Typically the curve is in what's called contango, upward sloping with the later futures trading higher.
"We're now experiencing a supply chain disruption -- not just in Brent and WTI, but really across all energy liquids on a scale that we haven't really seen before," said Benjamin Hoff, global head of commodities quant research at Societe Generale SA. "And while some trend systems have benefited so far, this is exactly where there are very clear limits to what any self-respecting quant system can claim to capture."
The exact implementation of curve carry strategies can vary, with some dynamically adjusting which part of the curve to trade and others neutralizing the exposure to beta, or overall market direction. Regardless of approach, at its core carry is popular because it captures a structural premium that's expected to last, Hoff said.
That's borne out by the long-term performance: the UBS index has been positive in every year but one. The trade has also proved a solid defensive bet in other selloffs, like March 2020, when oil briefly went negative at the start of the pandemic.
Nonetheless, a historic shock like this one is exactly the kind of risk borne by carry trades, which by design reap small profits in normal conditions. And 2026 has already been unusually volatile for the strategy. January was the worst month on record for the UBS index as a winter storm disrupted supply and raised heating demand.
Commodity curve carry strategies have dropped 3% this year as of March 11, according to Premialab, a data provider that aggregates QIS returns. That's a big move for a trade built to harvest typically a few percentage points a year.
Because most such trades are short near-dated contracts and long three- or six-month ones, "the moves have been quite severe," said Matthew Yeates, co-chief investment officer at Seven Investment Management, which is invested in some of these strategies. "However, over the full-cycle history of these positions it's the carry that matters."
Commodities have been a big part of the booming QIS industry, with bank swaps offering easy access for some pensions or hedge funds that might not otherwise trade the asset class. The $134 billion run by QIS compares to just $7.4 billion in commodity strategies run by risk premia asset managers, the Albourne survey shows.
Curve carry aside, other commodity QIS have been a mixed bag. Volatility carry, which sells commodity options, lost 4.4% this month through March 10, according to LumRisk, another QIS aggregator. Trend, which simply rides momentum across futures, rose 3.8% partly thanks to the oil rally. Value gained 3.1%.
Value and trend have been able to profit from the recent volatility because early market signals of potential stress in oil enabled those strategies to position accordingly, says Xavier Folleas, global head of QIS at BNP Paribas.
As for curve carry, the bank is having early discussions with some clients about positioning for some normalization.
"There's no consensus on that because it depends exactly on the outcome of the geopolitical discussions," he said. "But if the situation is better in the following weeks, you will have a decrease of the price of the front end of the curve and in that respect, it's a good entry point."