Oil market speculation

The Importance of the "Roll Return" in Commodity Futures Returns

..."Roll Return" is the difference between the current spot (what you pay if you "consume" the commodity today) and the futures contract price. It is also the return a futures contract holder would earn if the spot price stays constant until the expiration of the futures contract - in which case the price of the futures contract would gradually converge to the spot price. Assuming the spot price is held constant, a futures contract holder will earn a positive roll return if the price of the futures contract is lower than the spot price (this behavior is termed "backwardization"). Conversely, a futures contract holder will experience a negative roll return if the price of the futures contract is higher than the spot price and is converging to it over time (this is termed "contango")"...

It seems that a speculator long an oil contract would have strong incentive to roll over to the next period contract should the current contract get bid up too close to the spot price. Of course the spot price starts moving up if the spread between spot and the front month contract moves up to where the physical holder makes more by selling at the contract date rather than immediately. Then you get momentum bids on the contract because the contract price is moving up. A positive feedback loop...once your long contract gets too close to spot you will want to roll over to the next month to avoid a small or negative return...and you will keep doing that until the spot price goes up enough or you have to pay back the margin loan or return the capital that is invested.

Naked Capitalism points to a possible solution: "Exchanges could impost a "liquidation only" requirement, which was last used to break the Hunt brothers' attempted corner of the silver market in the early 1980s "... in this case no one is allowed to roll over to the next contract, so if you are long contracts you have to offset with shorts because you don't want to take delivery. The rapid increase in short interest pushes contract price down and the feedback loop is broken.