Guest Post: Did The World’s Largest Futures Exchange Enable $200 Oil?

Tyler Durden's picture

Submitted by Deep Fritz

Petrochop - A Sign of a Petrocurrency Shift

Did the world’s largest futures exchange enable $200 oil?

What happened?

  • On April 18, 2011, the Chicago Mercantile Exchange launched six Euro-denominated oil contracts - one Brent crude oil and five gasoil.1
  • Pricing, margining and treasury for exchange-cleared oil price management can be fully executed in Euros.

On the surface, this appears to be a reasonable product suite offer from the CME.  These contracts are financially-settled and rely on the US dollar oil contracts that trade on ICE, the Intercontinental Exchange.  These contracts should make certain trading functions more streamlined for oil exporters to and oil consumers in the Euro-zone.  For some users, no need to buy US dollars to effect oil trades.  Seems like a nothing-to-see-here moment….

The Petrodollar Economy

Most oil sales throughout the world are denominated in US dollars. Since 1973, OPEC exports have been priced in US dollars.  This marketplace gave rise to trillions of petrodollars that get cycled into international oil trade and international US dollar assets.  As global oil sales grow (volume times price), the recycling of US dollars into US dollar assets grow.

What if US dollar hegemony in oil settlements changes?

Since most countries rely on oil imports, they are forced to maintain large stockpiles of dollars 2,3,4 in order to continue imports. 5 This creates a consistent demand for US dollars and upwards pressure on the US dollar’s value, regardless of economic conditions in the United States.  This in turn allegedly allows the US government to issue currency below cost of currency production (seignorage) and bonds at lower interest rates than they otherwise would be able to.6 As a result the U.S. government can run higher budget deficits at a more sustainable level than can most other countries.  A stronger US dollar also means that goods imported into the United States are relatively cheap.  It appears to be to the US’ advantage to maintain US dollar hegemony.7

If the denomination of oil sales changes to another currency, such as the euro, many countries would sell dollars and cause the banks to shift their reserves, as they would no longer need dollars to buy oil. 8 Forty years of petrodollars would start to get flushed from central bank reserves.  This shift in petrocurrency reserve status would lower the volume and velocity of US dollar recycling and thus weaken the dollar relative to the Euro.  The EU would accrue the same benefits from Euro-denominated oil sales that the US

What did the CME do?

The CME offered six Euro-denominated oil contracts.  The oils are European delivery and the contracts are financially-settled.  These are generally for hedging and risk management purposes.  At this writing it is unclear if these contracts will be successful (as gauged by turnover).  It is unknown if the CME or other energy bourses will offer more oil futures contracts denominated in Euros. 

If the contracts are successful, could there then be a move towards Euro-denominated oil sales?  There is doubt as to whether oil settlements can really move away from the US dollar. 9 There is evidence that OPEC cannot unilaterally decide to price their exports in Euros.  There is no evidence that the network of global oil trade has requested non-US dollar contracts.  In the early 2000’s, Russia floated the idea of oil settlements in Euros; the idea died in 2003.  Other oil export countries have made more recent pronouncements of movements away from US dollar oil sales that appear to be more political than administrative for now. 10,11

Is this a nothing-to-see-here moment?  What is known, however, is that the world’s largest futures exchange has made it possible for any entity to enter into Euro-denominated oil trades.  If these contracts get traction and grow, there may be a significant effect upon the USD/Euro relationship.  USD 200/bbl oil is in the cards and a petrocurrency change may be a reason cited should the oil market achieve that round number.

 

 


1. CME Energy products update April 14, 2011 http://www.cmegroup.com/trading/energy/online-marketing/energy-update-041411.html#3

2. Euro, Dollar Reserves Take a Trim, by Bradley Davis The Wall Street Journal Online July 1, 2010 http://online.wsj.com/article/SB10001424052748703426004575338714242806530.html

 

3. Asian Central Banks Consider Alternatives to Big Dollar Holdings Phillip Day The Wall Street Journal , 5 February 2004 http://yaleglobal.yale.edu/content/asian-central-banks-consider-alternatives-big-dollar-holdings

4. The Falling Dollar and the Stubborn US Trade Deficit by Prof. Peter Morici University of Maryland undated http://www.globalpolitician.com/print.asp?id=3679

5. The Crisis of the US Dollar System by F. William Engdahl October 14, 2006 http://www.globalresearch.ca/index.php?context=va&aid=3482
“The German central bank thus builds up its dollar currency reserves. Since the oil shocks of the 1970's, the need to have dollars to import oil became national security policy for most countries, Germany included. Boosting dollar exports was a national goal. But since the Bundesbank no longer could get gold for their dollars, the issue became what to do with the mountain of dollars their trade earned.”

6. Revisited - The Real Reasons for the Upcoming War With Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth by William Clark Original Essay January 2003 -Revised March 2003
-Post-war Commentary January 2004 http://www.ratical.org/ratville/CAH/RRiraqWar.pdf

7. The hidden hand of American hegemony : petrodollar recycling and international markets / David E. Spiro. Ithaca, NY : Cornell University Press, 1999. xiv, 177 p. ; 25 cm. LOC call

8. A New American Century? Iraq and the hidden euro-dollar wars by F. William Engdahl

9. February 2004  http://www.globalresearch.ca/articles/ENG401A.html
  From Petrodollars to Petroeuros: Are the Dollar's Days as an International Reserve Currency Drawing to an End? by Robert Looney, Center for Contemporary Conflict (CCC). The CCC is the research arm of the National Security Affairs Department at the Naval Postgraduate School in Monterey, California.

10. Libya All About Oil, or Central Banking by Ellen Brown Asia Times Online April 14, 2011.

11.  The Demise of the Dollar by Robert Fisk October 6, 2009 http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html

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Sutton's picture

Remember the Iranian Oil Bourse?

It was going to topple empires.

 

Yen Cross's picture

I wish, we could use the (BOURSE) idea in the States. It is half way between (Fair Market Value, and European indecision!) Gotta love Club Med, and EUR/USD highs. Gotta love how EU banks hit the Fed discount window. Are we seeing RED yet!!!!!!!!!!!!!!!!

Yen Cross's picture

I wish That the person that junked me had an arguement?

jerry_theking_lawler's picture

sorry. i just junked you. i actually junk anyone who mentions 'junk' in their posts....including me. i just junked myself.

Bearster's picture

The premise of this article is a silly error.  Buyers of oil do *NOT* need to keep a stockpile of dollars.  The market for dollars is liquid; one can buy dollars at the last minute, if one wishes, and the seller of the oil can sell dollars at the last minute.  Bid-ask spreads are a tiny frictional cost (at worst, assuming neither party wants to hold dollars).

There are many reasons why countries hold dollars, but this isn't one of them.

dark pools of soros's picture

and Ben has his printers in Kinkos over 55 countries worldwide!!!

UninterestedObserver's picture

The fact that they need to buy and sell dollars was the point - to say if all oil trade was no longer done in dollars it wouldn't matter is ludicrous.

Emerald Floyd's picture

quote : 

What happened?

  • On April 18, 2011, the Chicago Mercantile Exchange launched six Euro-denominated oil contracts - one Brent crude oil and five gasoil.1

 

Whay happned on april 18th 2011 ? It can't possibly have happened on the date posted.

They have launched it or they will launch it.The dated stated, 04/18/2011 hasn't occured yet, it's next week.

Emerald Floyd's picture

deleted as double post ed in error.

Your Mama's picture

The cme might as well take advantage of the seemingly inevitable....but what happens when the euro goes the way of the dodo

Urban Redneck's picture

SHIT Someone is going to get a phone call this evening.

latcho's picture

Thanks for the call ! Nice talking to ya.

CrashisOptimistic's picture

WTI $109.66 at the close.  There is some evidence that US demand destruction can occur long before China/India demand destruction -- and that is going to translate into US GDP That Gets Worse even after it collapses.

Meaning, the US could see $15/gallon at the pump and have its demand smashed (aka GDP) but China and India might still be driving the price higher at that point.

Urban Redneck's picture

While the article mentioned that the Russian idea for the euro died in 03, it failed to mention that 2 years ago they signed an agreement that their sales to China would be settled in commie bucks, bypassing both USD & EUR.  But then who reads those tedious press releases on banking holidays.

oklaboy's picture

all fiats are dodoo's. Do you want a nice pile of deep, dark brown solid turds, or a pile of light green, squishy turds?

Yen Cross's picture

Rhetorical solutions?

InconvenientCounterParty's picture

Why don't they save themselves some embarassment and just settle in gold/silver/copper money?

magpie's picture

If the gold price is an indication with its hovering at 1000 € per ounce, 100 € per barrel might be a target.

1fortheroad's picture

ICE, Goldman sacs has his smelly fingers in everthing.

According to Davis, the scam starts in 2000 with the formation of the ICE - the Intercontinental Exchange. The ICE - founded by Goldman Sachs, Morgan Stanley, BP, Total, Shell, Deutsche Bank and Societe Generale - is an online commodities and futures marketplace that exists outside the US and operates free from the constraints of US laws.

http://concen.org/forum/showthread.php?tid=31284

Yen Cross's picture

Lets merge a thought or two. (Deutsche Boerse or NASDAQ)?

buzzsaw99's picture

The Bernank is pleased.

Dr. Porkchop's picture

I hadn't noticed, because I usually only fill up every week and half to two weeks, but gas is up to $1.32 /L here in Canada. Fak me.

ParaZite's picture

Criminals enabling criminals? That's like politicians creating legislation for their corporate sponsors. Oh, wait... 

pitz's picture

There is no need whatsoever, today, yesterday, 10 years ago, 20 years ago, to hold dollars, to settle transactions in oil or other imports, as reserves.  Currencies are fungible.  Foreigners are holding the USD$ because they want to, not because they have to for the purpose of imports. 

Yen Cross's picture

I'm running RSI and Stochastics on crude. Every scenario, POINTS INTO THE 96.8-92.230 AREA. Cushing is in contango STILL!

Lord Peter Pipsqueak's picture

Many conspiracy theorists have theorised that the reason for Gulf War 1 against Saddam Hussein was because he wanted to set up a Euro denominated oil exchange.

Now we have a US exchange doing exactly what the USmay have gone to war to prevent, and which possibly resulted in the loss of hundreds of thousands of lives.

Am I the only person who finds this bizarre and more surprising is the total lack of comment so far?. 

 

robobbob's picture

What is "not how its being traded, but who's running the trade"?

Rick64's picture

The oils are European delivery and the contracts are financially-settled. These are generally for hedging and risk management purposes.

 I assume that this means they are settled in cash and prices are based on european oil that is delivered. So only cash settlement and no physical delivery? If so its not much of a threat .

 

fxrxexexdxoxmx's picture

#1174744

 conspiracy theorists have theorised 

Am I the only person who finds this bizarre and more surprising is the total lack of comment so far?. 

Of what use are theories which have no proof?

Spalding_Smailes's picture

Dollar Denominated Debt .... Who would have thunk it .....

The dollar remains the bedrock of the international monetary system. Its dominant status benefits the United States and reduces transactions costs for the rest of the world. But, as the United States pursues fiscally irresponsible policies that keep the debt high and other economies gain world GDP share, a multi-reserve-currency system is likely to emerge in the long run. This is not necessarily bad news—the United States can still retain most of its economic benefits, and transaction costs will stay low as long as the number of dominant currencies is limited.

Dollar Dominance

The dollar is the world’s main currency. It accounts for 61 percent of official reserve holdings, is used in 85 percent of foreign exchange transactions, and serves as the currency of choice for 45 percent of international debt securities and more than half of world exports.

But dollar dominance also holds significant costs for the United States and the rest of the world. The dollar’s status makes it easier for the United States to consume and invest beyond its means. Demand for the currency also pushes its value up—as seen several times during the Great Recession when the dollar appreciated as investors fled to safety—posing a challenge for U.S. exports. The need for global liquidity puts additional pressure on the United States to maintain a current account deficit. And, because the currency is used heavily for investment purposes, its value tends to be more volatile than that of currencies used purely for commercial purposes. At the same time, irresponsible U.S. economic policy also contributes to gyrations in the dollar’s value, leaving countries vulnerable to fluctuations in the value of their wealth. And loose U.S. monetary policy leaves other countries vulnerable to importing inflation from the United States.

Nevertheless, the dollar maintains its role as the dominant currency for two reasons. First, reserve currency status, like computer operating systems, is subject to “first mover advantage”: the fact that the dollar is accepted in most transactions increases the demand for dollars and makes it harder for newcomers to gain market share.

Second, no reasonable alternative appears better for the job, at least in the short term:

http://carnegieendowment.org/ieb/?fa=view&id=43587

Spalding_Smailes's picture

China credit issues looming .... This is what an investment driven economy does it keeps building so it can print 9% GDP


 

Yield Gap Doubles for Railroad in Spending Splurge: China Credit

Borrowing costs for China’s Ministry of Railways are surging this year amid concern the builder of the world’s biggest high-speed network will struggle to repay 1.8 trillion yuan ($275 billion) of debt.

China plans to spend 2.8 trillion yuan in the five years to 2015 on railway infrastructure to help sustain economic growth.

“The railway ministry cannot pay” its debt, said Zhao Jian, a professor at Beijing Jiaotong University, which can trace its origins to China’s School of Railway Management in 1909. “The central government will. This will happen within the near future, within the next five years,” he said.

The spread on the ministry’s 3.88 percent bonds due in 2020 over similar-maturity government notes reached 102 basis points, or 1.02 percentage point, on April 13, from a 66-basis point gap when the security began trading in September, Chinabond prices show.

“Repayment is going to be an issue sometime down the road when the financial situation worsens further,” said Karen Li, the head of infrastructure research at JPMorgan Chase & Co. in Hong Kong. “They still have a lot of capex commitments over the next few years” as many projects are incomplete, she said.

Railway spending totaled 1.42 trillion yuan over the last two years, 33 percent more than was invested in the previous five, according to data compiled by Bloomberg. China plans to add as much as 30,000 kilometers of new track before 2015 to its 91,000-kilometers network, the People’s Daily reported April 13, citing Minister Sheng.

“They can borrow new loans to repay old loans, that’s how it’s operating,” said Zhao, adding that new rail services may not attract enough passengers. “It can’t go on like this.”


China may be forced to form a company to absorb all of the ministry’s debt within the next five years to avert default, said Zhao. The ministry may be restructured with all its “good assets” placed into a company that will be sold to investors via an initial public offering, according to JPMorgan’s Li.

Chinese risk assessors such as China Chengxin International Credit Rating Co., Dagong Global Credit Rating Co. and China Lianhe Credit Rating Co. give the ministry their top AAA ranking.

“Their refinancing ability is very strong,” Zhang Jun, an analyst at China Chengxin, said from Beijing. “Liquidity may be weak, but the ministry depends on refinancing, not cash generated from the operations.”

http://www.bloomberg.com/news/2011-04-14/yield-gap-doubles-for-railroad-...

 

 

FreedomGuy's picture

Remember that capitalism and honesty are new games for the Chinese. Central planning and lieing are not. It's a tough transition that you might not want to invest heavily in.

CrashisOptimistic's picture

OTOH, there is that sticky reality that the Saudis DID NOT replace Libya's shut in production.  They said they would.  They even said they were doing it, and then . . .they didn't.

Because of inadequate demand.  But you see, all they have to do is provide a quote of $300 / barrel to any inquiry for purchase of additional oil, and presto, the customer disappears and they get to say "we see no increase in demand and therefore will not produce more."

THAT, fellows, is how you get away with claiming to have 12 mbpd of production capability, but never have to prove it.

 

Rick64's picture

"Saudi Arabia the last two times said they are going to increase production and they couldn't increase production. Don't fall for that. The reason oil is going up is the world is running out of known reserves of oil."  Jim Rogers

AmericaRacket's picture

This is called begging the question.  Oil reserves are constantly revised up and down.  There is thus no hard evidence of Peak Oil because oil reserve estimates are not credible, in addition to the fact that it is in the Oil Cartels' interest to keep public estimates of reserves low in order to justify high prices in an inelastic commodity.

The best the Peakniks can do is say, "well, you have to admit that oil is finite, and thus it will end eventually" without registering tht the same can be said for hydrogen in the sun.  I am not defending US oil dependence or the Oil Regime in particular, and believe there are viable alternatives.  Peak Oil, however, is a scam.

Rick64's picture

 The price of oil has little to do with reserves even though it should and more to do with the dollar fluctuation. The cheaper the dollar is the more people are going to stockpile it thus driving the price up. I think that peak oil is real, but as long as they mask the problem then it provides cover for the real price driver, the dollar dilution.  IMO

Abitdodgie's picture

I do kind of agree with that statement , however I would not say the world is running out of oil ,it is not , it is however running out of cheap oil .

Dr. Impossible's picture

now thats a fasinating model! I think i've heard similiar counter arguements to a gold-standard. something about not enough gold.

i guess american education just doesnt teach common sense. gold @ $2000 oz...correct not enough to back $, 1oz gold at $1,000,000, and BLAMO, we have a government surplus!!!

web bot's picture

There was a time that Americans acted in their own interest. Its to the point that if one can sink the US or profit from it, they're a hero.

I know, old fashioned ideas like patriatism are really in the relm of nostalgia or Mel Gibson movies...

It wasn't that long ago that governments were strategic in their decision making, while making sure the national interest was taken care of. I'm all for globalization, but has it just become an orgy?

Caviar Emptor's picture

Tricky Dick scored in the "President as Crook" dept. Then for a while we could believe that you could be a crook and a patriot. Since 2008 it's just been every man for himself. 

Freddie's picture

Here comes $5 a gallon.

mynhair's picture

Oh, King $, I knew him well.

Caviar Emptor's picture

Somewhere in all this there's a low grade panic going on over oil. They tell us "don't worry". :-)