Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
In my opinion, the IPE was a joke.  Cash settled, thin market, barrow boy rules.  Anybody using it to price large quantities of oil, especially off of settles, was brain dead and got what could be expected and perhaps what they deserved.  Ditto Platts/Argus/OPIS/whoever.

All are fine if you can accept that their daily answer is accurate to no better  than +/-3% and therefore use long averages (minimum a month).  If you are sensitive to the last 10 cts out of $20 on a Brent settle or 1/2%, then you need to grow some balls and sell flat price and quite blaming other people for your situation.  The Scandi's I traded with understood this completely and were just as quick to play the same games while their management bleated like sheep.  No tears from me for Statoil.  

Same for the Mid East lot.  They all want a constant high price off of a formula that absolves them of responsibility.  Which is why I think your IOB will never fly.  They don't really want control because with control comes responsibility and accountability.  They want someone else to set the last few % and still have the lean always go their way.  ho ho ho.

As for GSCI, all I saw from the other perspective was a huge futures position, with rigid rollover rules such that any nimble local or player could front run it to death.  The GS trading desk was struggling to find ways to keep those settles from being consistently shaded against the index investor.  But again, investing in  an index with a structural flaw like GSCI is your own mistake.  I note that now that we've had nearly 2 years of deep contango such that each months rollover is killing the index, GS is selling it off.  Hard to flog an index that returns -20% when the market is flat over a year.

I never saw any overt collusion though I have had it proposed to me by a large Dutch trading house player. Rumors abounded but I never saw hard evidence or witnessed anything with my own eyes/ears. BP were very, very aggressive about pushing around the market.  No surprise that they are getting bad press for their LPG and other books in the US.  I will not be surprised if they are found guilty.  If Europe had any real regulation, many would have gotten in trouble there as well.  Half of ENEL would have been in jail and all of their suppliers prior to about 1992.  I see some Germans are about to get convicted for bribes to ENEL managers in recent times on procurement.  Some things don't change I guess.  

by HiD on Wed Mar 21st, 2007 at 09:32:18 PM EST
Which is why I think your IOB will never fly.

I must say I go along with that view.

But I'm not proposing conventional geared futures contracts for the IOB (which is glacial in progress, to ssay the least). I'm proposing units in a "pool" of crude oil more akin to shares in an ETF.

An "asset-based" contract rather than a deficit-based one.

Paid up front, so no gearing: except of course you are free to borrow to buy the units.

So no monthly expiry dates, roll-overs and all of the costs that go with it.

And I will bet a pound to a penny that the Chinese - to name but one, would buy as much of this "virtual crude" as you could put on the market in preference to holding their reserves in dollars....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Mar 22nd, 2007 at 03:21:10 AM EST
[ Parent ]
but I don't see what you are proposing doing anything to address the underlying problem -- The crude owners do not wish to sell fixed price today for delivery down the road.  They want the down-the-road price and they want it to be higher, specifically as high as possible on the day of lifting and no less.  Pre-selling fixed price exposes the decider to questions on the lines of:

You sold 100 million bbls at $60/bbl?  The market is now $100.  We'd like you to go renege on the deal -- we'll get the Indians to prevent an invasion and sell it to them at $90 instead.  Why not.  It worked for the Venz, the Columbian, the Mexicans ....

Oilco/sovereign  management at all levels have no wish to have any system that makes them personally accountable for setting prices.  Their pay is too low to stomach the abuse that follows getting it wrong and their pay does not go up if they get it right. It's a no win equation.  Which is precisely why sovereigns and Oilco types love to do sales at Platts hi + X with a narrow set of dates or purchases at Low - X.  They know the customer will have to bash/ramp Platts on those dates since the material is only worth mean.  They are tacitly complicit in the manipulation that they then turn around and decry.  Only in Lake Wobegon is everyone child above average.

I also rather doubt the Chinese will be too excited to pre-pay in full for future delivery to an Iranian government that is slowly but surely pissing off the populace.  I figure they've got 10 yrs max before there is another revolution.  Iraq won't even have a government in a year.  More likely to be 2 or 3.  The rest of OPEC could not care less about cash up front.  They have plenty of cash of their own.  Buying the oil in the ground at the usual discount (equity ownership in the fields themselves) hoping to keep control using the same techniques the west has been pioneering in shitholes like Angola or Nigeria might work for CNOOC.  But handing over cash with just a promise????  You better get paid up front for your work is all I'd suggest.

As for labeling it "asset based" when in the end the selling party is still only obligated by a promise vs. labeling it "debt based" strikes me as sophistry (though I wishI could come up with a less loaded word.  I believe you to be sincere).  

by HiD on Thu Mar 22nd, 2007 at 05:16:27 AM EST
[ Parent ]
Key to this is the role of a "Custodian" of the "Pool" created.

Possibly the custodian "owns" the tanks and tankers and has operating partners run them.

Sellers sell into the Pool: buyers buy from the Pool. Speculators can buy and sell oil in the Pool but do not participate in the price setting, which is based upon the price of oil going in and out of the pool.

I'm not minimising the legal difficulties of this - I have never seen it as less than a five year project and then only if it works in other markets.

Which is why we are looking at trialling the structure on creating new markets where none exist, or could exist, using conventional structures.

LNG is a candidate for an entirely new "asset-based" approach, as is renewable energy.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Mar 22nd, 2007 at 06:45:31 AM EST
[ Parent ]
The large pool of oil you describe is in the ground in a myriad of countries.  No big producer has huge tanks of unsold oil beyond what they need for operational flex. It's too much capital tied up and nowadays would just be a target for Osama (Saudis do sometimes rent in order to take market swings without screwing with the fields too much).

Reliance on the performance of oil nations, many of which are run by criminals is a no hoper.  Good luck.  Maybe you'll prove me wrong.

Markets where the countries already have strong rule of law and players have good credit/performance reputations are doing fine with traditional finance.  Aussie LNG is pre-sold to the Japanese such that financing (often from Japanese banks) is secured.  Seems to me that already matches your re-labeling exercise pretty closely.  The players divvy up the expected profits based on their own projections and a negotiation.  

by HiD on Thu Mar 22nd, 2007 at 07:12:47 AM EST
[ Parent ]


Occasional Series