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At 85 MMBD of crude at $60/bbl I calc $5 billion of crude being produced per day.  The same volume at a higher price moves as product after refining. Then you have nat gas.  So $25 Billion+ per day compared to $26 billion/year is about 0.3 percent???  Microsoft makes 28% flogging software (sales of $50 billionish).   I'm having a hard time getting excited about that level of cost for hedging.

Moreover, the real physical buyers/sellers dont need middlemen. Saudi sells to Chevron/Exxon/Shell/whoever and don't hedge, period.  If Chevy et al were losing $26 billion hedging they'd stop.  In my day losing a few million ended all speculation and hedging at Chevron (watched it happen) and Exxon didn't hedge at all at that time.  When the hedge funds get tired of losing (and they will over time), this game will dry up.

So just who will pay up for that much "service"?  In my era Russian gasoil was a big speculative vehicle.  Cargos of 20-25 KT could be passed down chains of 20-100 players each of whom paid a broker 25cts/metric ton in sales commision.  The oil was only worth about $110/mt then so theoretically 25% of the oil value disappeared into commissions.  Yet the original Russian got $100ish and the end user paid $110.  Most of the difference was shipping, losses etc.  Where did the rest come from?  Pretty easy.  Within my 6-8 year cycle through the biz, the Russian Roulette as it was called went away.  The losers went bust one by one or just stopped when the pain got too much.  Russian still flowed to end users with a few middlemen, but the speculation dried up and migrated to the IPE where the brokerage commission was peanuts.  We killed off all the "players" in my area as well to the point it was hard to find a counterparty to trade with at times.
So off to derivatives we all rushed.

If people get tired of big extraction in the spec markets, they can just term up their biz at fixed prices.  I have a friend that is a very small nat gas producer.  He sold his gas last year at $10/mmscf for the year.  No hedging cost.  If the utility he sold to just sells to their customers at a fixed cost as well, no hedging again.  That works fine with industrial users.  And when mom and pop decide for an annual price, they can play too.  No need for some overarching system.  'course people bitch when the market price goes down and they have a fixed price so there's the rub.

barclays can talk big, but lets see how well that goes when they blow up like Amaranth or Neste (ca. 1994) or several others I could name.  I seem to recall Barclays firing all their people at one point in the 90's as well though it may have been one of the other commercials.  One of them couldn't calculate the value of accumulating forwards to the point their bid/ask was so off the market that one of the oilco's back to backed them to Aron and Morgan at a huge profit.  bye bye trading team.

As for corrupt dealings.  No question.  The UK authorities should have been bugging a few phones about 1993-5 in my opinion.  I had a Vitol trader come right out and suggest divving up the market in one specific type of Russian product.  That appeared to be their style across the bbl.  Another Ex Marc Rich player virtually admitted they bribed gov't officials if that's what it took.  BP's approach to the US propane market matches my recollection of their style as well though I never saw anything obviously illegal.  many rumors of collusion among these sorts but I've no proof .   The guys I sat with who got fired for colluding on cutting brokerage commissions (allegedly or maybe the insults toward the management when the tapes were replayed did it???) moved over to Phibro/SB where they continued to ram markets around.  Last time I googled they were still doing it for yet another outfit.   Without an Eliot Spitzer this shit keeps on keeping on.

Real market regulation will take a lot of the crap away.  But hedging itself is not cheap.    

by HiD on Sun Nov 12th, 2006 at 02:28:26 AM EST
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