For example, suppose the spot price of oil is $58 and the market is inverted because inventories are relatively low. This means the first futures price might be at $57 and the next contract at $56. You go long the front contract as described above. Now suppose a few weeks pass and nothing happens to the spot price. The futures contract you own moves toward the spot price as delivery approaches, and we can assume the spreadbetween the futures stays at a dollar. You sell your maturing futures near the $58 spot price and buy the next future for around $57. Note that in an inverted market you make money from the roll yield even if commodity prices remain unchanged.
I don’t get the first part: If inventories are low, then prices should be HIGHER because of supply vs. demand right?
You earn a positive roll yield when you buy a forward that is priced lower than the spot price. So if you enter a forward contract to buy commodity x at $48 in 3 months time and when spot prices are $50 then you earn $2 roll. If spot prices rise to say $55 while you’re holding the $48 contract, your potential profit goes to $7, but I believe the roll is stil technically considered $2 and the additional $5 is considered attributable to spot price return.
When future prices are higher than spot prices (contango), you’ll get negative roll yield; when future prices are lower than spot prices (backwardation), you’ll get positive roll yield;