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Guest Post: Did The World’s Largest Futures Exchange Enable $200 Oil?
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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Remember the Iranian Oil Bourse?
It was going to topple empires.
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!!!!!!!!!!!!!!!!
I wish That the person that junked me had an arguement?
sorry. i just junked you. i actually junk anyone who mentions 'junk' in their posts....including me. i just junked myself.
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.
and Ben has his printers in Kinkos over 55 countries worldwide!!!
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.
quote :
What happened?
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.
deleted as double post ed in error.
The cme might as well take advantage of the seemingly inevitable....but what happens when the euro goes the way of the dodo
SHIT Someone is going to get a phone call this evening.
Thanks for the call ! Nice talking to ya.
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.
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.
How about Gas for $2.80 a Gallon?
http://radio.woai.com/cc-common/mainheadlines3.html?feed=119078&article=8438992
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?
Rhetorical solutions?
Why don't they save themselves some embarassment and just settle in gold/silver/copper money?
If the gold price is an indication with its hovering at 1000 € per ounce, 100 € per barrel might be a target.
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
Lets merge a thought or two. (Deutsche Boerse or NASDAQ)?
A menial junkster?
NIFTY ready to EXPLODE higher::;
http://markettechnicals-jonak.blogspot.com/
http://www.youtube.com/watch?v=Pbje3ub5Dio&feature=player_embedded#at=156
The Bernank is pleased.
Once again.
http://youtu.be/Tb30nthVDWI
I hadn't noticed, because I usually only fill up every week and half to two weeks, but gas is up to $1.32 /L here in Canada. Fak me.
Criminals enabling criminals? That's like politicians creating legislation for their corporate sponsors. Oh, wait...
There is no need whatsoever, today, yesterday, 10 years ago, 20 years ago, to hold dollars, to settle transactions in oil or other imports, as reserves. Currencies are fungible. Foreigners are holding the USD$ because they want to, not because they have to for the purpose of imports.
I'm running RSI and Stochastics on crude. Every scenario, POINTS INTO THE 96.8-92.230 AREA. Cushing is in contango STILL!
Let's play
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?.
What is "not how its being traded, but who's running the trade"?
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 .
#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?
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
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 CreditBorrowing 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-...
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.
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.
"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
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.
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
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 .
Agree.
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!!!
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?
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.
Here comes $5 a gallon.
Oh, King $, I knew him well.
Somewhere in all this there's a low grade panic going on over oil. They tell us "don't worry". :-)
Timely information - thank you
...curious? Gen Clark on: Future Middle East Conflicts. http://www.youtube.com/watch?v=1x9EYiKVQg4
...then there this Pastor guy http://www.youtube.com/watch?v=U-kmI1hzbI0
...put it all together with this euro play and what do you have? no more hot dogs? http://www.youtube.com/watch?v=8Cio5mgjDXw
Ummm..."On April 18, 2011, the Chicago Mercantile Exchange launched"...
Crystal-ballish? April 14? And unclear to me that these "Swap Futures" mandate settlement in delivery of actual product.
$200 oil? Sydney gets ready
4/4/2011
Sydney's RTA builds M2 exit lanes for $200 oil
http://www.crudeoilpeak.com/?p=2872
Grifting Speed!
http://www.youtube.com/watch?v=WXh1tW16V-8&feature=related
"Of what use are theories which have no proof?"
We''ll all just read the papers and watch CNBC for our information then?
Isn't ZH based more or less on the belief that an organised banking cartel has taken over the US government and now is involved in a malicious, self perpetuating corruption of the whole political and regulatory process that has led to the entire countryy being held ransom by the very people that have driven it to the brink of bankruptcy?.
But as you say,there is no proof of the above,so Tyler and Co. and everyone reading and posting on this site and others are all wasting their time.
'Isn't ZH based more or less on the belief that an organised banking cartel has taken over the US government and now is involved in a malicious, self perpetuating corruption of the whole political and regulatory process that has led to the entire countryy being held ransom by the very people that have driven it to the brink of bankruptcy?.'
When i read those thoughts coalesced, my time has not been wasted.
its always good to read here on ZH.
ERX
I love the date of 4-18-11, as today is the 16th - and in the past tense, no less. Your propaganda dept working overtime... to set the news cycle before the news.
http://www.cmegroup.com/tools-information/lookups/advisories/market-regu...
Notice Date April 06, 2011 Effective Date April 17, 201125% of US import is oil, but middle' east's largest customer is still EU. Better CME trade it in Euros than Iran trade in Bourse.
US wasted superpower status. Now US is competiting with EU and China and Russia are gearing up.
Worth rereading the 2009 article by Fisk cited in the post. Talk about things that make you go hmmm.
We should all welcome $5.00 a gallon because it assures that O will not even win his primary yet alone the election and another 4 years. Me thinks that $2.00 gas is inevitable right around spring of 2012 just in time for the election. Not like anyone else will be better but at least it won't be his lying, non-citizen ass at the helm anymore. Nobody spends millions of dollars to hide their birth certificate unless there is something to hide...
Keep falling for the Left-Right farce. Obama/Palin 2012. If not Palin, someone just as bad.
Who knows what TPTB are trying to do with this? Do they think Obama is discredited and thus wish to destroy him? The only way Palin can win is an October surprise shoeing Obama in bed with a 12 year old boy. They might pull something like that off.
You only have a birth certificate if you are born into servitude or slavery , free men do not have one .
This is no petrocurrency shift. It is a swap settled in cash. It does not deliver crude.
At best it can be used for hedging.
But why would anyone use it for hedging when you can simply enter a crude contract and an FX to lock in your cost in Euro?
Who should we blame for the higher oil prices?
http://www.youtube.com/user/wallstrip#p/u/50/aH53f0_ynTM
mmmmmm?
It's Monday and Pandora's box has been opened. The box itself is not dangerous, it’s what comes out of the box that hastens one's demise.
Paper Oil
Group-think pervades in the paper pimping business, and the particular variety that will likely ensue is package envy. If ICE continues to trade dollar denominated oil futures in Europe, while CME is offering Euro denominated contracts, the ICE is likely to suffer shrinkage, and the bankers-cum-bourse-bosses really don't want to have to discuss their shrinkage on earnings calls.
The marriage of extremely efficient business structures with grossly inefficient paper structurings creates the oil Arb bacchanalia. Oil Arb for Dummies just got easier with IBE-SMBRE. For those who play in the more realistic Benchmark-to-Blend arena, the options just increased significantly.
For speculators seeking to boost alpha on their commodities trades- the F/X volatility can be employed as a multiplier on the underlying oil price movements.
Transportation hedging just got easier for European exporters whose costs are in Euro and who are paid in Euro, ditto for European Airlines. Producers in developing economies who export to the Euro zone and receive Euro payments also will benefit from being able to hedge oil in Euros.
Singapore is a major junction of the paper and physical oil realms. Nations which produce the oil that feeds Singapore refineries are not dollar denominated. The end markets for Singapore refined oil are not dollar denominated. Look for Singapore to play leading role in the future development of non-Dollar-denominated oil products.
Physical Oil
One of the reasons for the previous abandonment of Euro settlement of the Russia-EU oil trade was the very lack of Euro denominated contracts with which to hedge the trade. As the Russians were among the first to the lifeboats when the USS GSEs struck an iceberg, look for them to continue their Dollar exit by dusting off this plan as soon as the volume becomes large enough to employ in an efficient hedging regime.
The actual oil production agreements, which exceed the number of priced oil blends in the market, are supposed to be closely held, although Gordon Barrows always seems to be on the CC list and will gladly sell you a copy. The contracts are very detailed and often include oil price calculations to an obscene number of decimal points (9 or so) for the US dollar. Changing the contracts is not an overnight process, even for regimes that intensely dislike propping up the USDX. Where there exists a marriage of a political regime seeking to reduce Dollar hegemony and EU oil companies (Total, Eni, Shell, etc.), look for the lawyers to be significantly increasing their billable hours in the future.
Once oil is measured in Euro from the point that it comes out of the ground, then denominating Blends in Euro becomes a real and inevitable option. If Russia is first out of the gate in migrating the settlement currency, and then restructures PSAs into Euro, then the intermediaries and intermediate steps including Blend quotes will naturally migrate to Euro.
Sovereign F/X
Regardless of whether a nation is a net-producer or net-consumer of petroleum, petroleum products make up a significant volume of its trade. For nations that peg their currencies- this tends to create an overweight Dollar peg because the petroleum industry is Dollar denominated. When the Russians and Chinese opened swap lines and agreed to transact their oil trade in commie bucks, the Yuan increased its percentage and the Dollar decreased its percentage of Russia's net F/X demand. When the Russians negotiate a new settlement currency for their EU oil exports, the same thing will happen again, in the context of the much larger Russia-EU oil trade.
While the oil trade seeks long-term diversification away from Dollar hegemony, and this foreshadows decreasing demand for USD, in the short-term there could be a decrease in prices as the concentration of hedgers and speculators in the USD Brent & WTI contracts is diluted as volume picks up in Euro denominated contracts.