Mots-clefs

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Since July 2014 the crude oil prices keep going down and OPEC looks as not being in a hurry to change the oil extraction policy. Both spot and futures prices continue to fall but, in my opinion, them leading to a world-wide deflation is only one of the points of view. Because nothing forbids us to perform a change of measure, from the governmental currencies unit to the crude oil unit.

The convenience yield is the benefit or premium associated with holding an underlying product or physical good, rather than the contract or derivative product, due to its relative scarcity versus high demand. Looking at today’s prices of the crude oil futures, they are continuously increasing with the time to expiry:

JAN 2015 56.86

JUL 2015 58.59

JAN 2016 60.64

JUL 2016 62.32

JAN 2017 63.45

It seems that the American oil market is not in contango and just the international one is, so the storage costs are neglected. For exemple the oil tanks in Cushing peaked at more than 50 million barrels in 2013, but the amount of oil being stored in Cushing has fallen by 60 percent, to around 20 million barrels. This is why I have thought that the (increase in) storage price does not contibute to or explains the future prices.

Starting from the simplified formula for future contract prices

(future price) = (spot price) x exp[(cost of carry) x (time to expiry)]

where the cost of carry is the risk free rate minus the convenience yield, and based on the increasing future prices, the average convenience yield is overall smaller than the average risk free rate. As speculators intend to do nothing with the oil itself and spot price is since quite a time low, this supports the idea that market agrees to make a blind money units versus oil units swap within all the available maturities. Petrocurrency is not a brand new concept and one could always pay-at-time-T using future crude oil contracts expiring then. But, when using FX exchange against crude oil units via future crude oil contracts, the two arbitrary members of clearing house practically have to decide on an OVC-type time to expiry for a virtual transaction.

However, also end of July 2014, the Hong Kong Monetary Authority (HKMA) and the Bank of Thailand jointly announced the official launch of a new cross-border payment-versus-payment link between Hong Kong’s US-dollar real-time gross settlement system and Thailand’s baht-denominated RTGS system. Concomitantly with the announcement, Advanced Markets, with a virtual clearing network including Bank of America, BNP Paribas, Barclays, Citi, Deutsche Bank, JP Morgan, Nomura, Morgan Stanley and UBS, has launched trading in spot crude oil, Russian rubble and Thai baht. The offered cash instruments closely track trading in the related front-months crude oil futures contracts, and, unlike futures, there is no expiry date one has to agree on. Through this solution users can bid and offer to seek price improvement and generate client-to-client matches, the buy-side users baing able t to trade bank liquidity as well as prices from non-bank market makers.

Oil units are different from the conventional currency units because they are employed by using futures agreements –type contacts, rather than bearer bonds type. But they keep being negotiable and they are legal tender as the exchange houses make sure they cannot be refused in the final settlement. In addition, there is the practical, administrative advantage of making possible the equivalent of paying a negative interest rate on bearer bonds, being normal that spot and future prices fluctuate up and down. They also incorporate the mark to future market concept, enlarging the present mark to market one. The current low crude oil price experience brings the silver line that on long term one could move from an oil virtual, base currency to an energy one.

Anyway, with the lowered demand from China and steady US supply, such oil prices are here to stay. Longer time the oil sticks to such a price, more powerful its currency concept will sound. Taking into account the about 30 bn EUR of Chinese lending to Russian corporations, with lots of it secured by oil shipping to China, the oil currency equivalence is just an issue of sufficient usage.

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