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February 27, 2006
John Mugarian comments on Iranian oil bourse, Mon., Feb. 27, 2006, 12:10 AM
I suppose I get as many queries about the Iran oil bourse that will start trading in Euros in March as I do on any subject these days. So today, John Mugarian has expressed a viewpoint that adds to the discussion.
How oil traders pay for their oil is important, but price is more important. Price is dependent on many factors, none of which is the price of the trade-weighted USD. Oil is a fungible asset, which means it is priced in USD (until now), but can be paid in anything of equal value, like Euros or gold.
Yes, if there is more demand for Euros, and less for USD, then the price of the trade-weighted USD, and the USD priced in Euros, will fall and the price of the Euro (priced in USD) will rise.
But on the NYMEX, where the majority of oil will be traded, there is nothing to stop them from opening up contracts for Crude Oil priced in Euros. The bigger market is the forex market, so after the initial trading imbalance that may exist while traders get their accounts set up to handle multiple currencies, over the long run the oil trading will revert to trading as it does today.
Any exchange is merely a facility. The value of that facility is in its order flow. If, as is most likely, the Iranian oil bourse has much less liquidity than NYMEX, then the spreads will be wider, and the customers will be giving up some of their prices to the local exchange and its brokers.
I don't know why any trader would do that -- unless it was an act of generosity. Traders go to where they get the best price, and where the regulatory oversight is best (so that all trades get settled as expected).
Can you really believe that traders are anticipating greater liquidity and better prices in Iran, and that they will stop using New York? I can't.
Getting past the U.N. concerns over Iran's present nuclear policy, or the 444-day hostage situation in Tehran that began November 1979, all else being equal, traders seek best liquidity and price. Moreover, I'm sure that if the French, who are major oil traders, thought they could base a new oil bourse in Paris (priced in Euros) and get the majority of global trading, then I'm sure they would have done it by now.
So why do people think that Iran is going to succeed?
Maybe I'm missing something here. If so, please tell me what it is. I want to learn. As you know, I'm a student of the market too.
Posted by Posted by Bill Cara on February 27, 2006 12:10:33 PM | Category: Cara Today in the Market
Discourse
Bill,
Maybe the game plan is simply to get oil trading in euros. The plan may be for the exchange to be successful and capture enough volume to either grow or force oil to be traded in euros on the NYMEX. I recall a captured terrorist that surprised the public by screaming something like; "THE DOLLAR IS DEAD!"? Surprising because it seemed out of place. Is that the end game?
Specialists exist to make bids and offers in thinly traded stocks. The deeper the pockets of the specialists firm, the tighter the spread and the better the size. With deep enough pockets, one could do this for any market. With 49% of the US debt in foreign hands, that may be the deep pockets. By spreading the other side of the trade through NYMEX, maybe their losses would be insignificant compared to their desire to have a vehicle that would allow them to slowly diversify out of dollars. With a healthy market from day one, and a lot of fanfare, you would see new traders come in looking for arbitrage opportunities in both the energy and currency markets.
I'm not saying that this is what will happen, only that having this exchange compete would not be that surprising to me.
Posted by: g034 ![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
February 27, 2006 1:18 PM [link]
This depends on what the Iranians are after. I think they are after mischief. The bourse will last as long as it has mischief value and the Iranians can support the cost. For example, they can sell oil at a euro price that is a discount from the current Euro/dollar exchange rate to try to influence the dollar. That's going to cost them real money.
The Mugarian piece was kind of strange. After accusing the Bush administration of smearing Iran and Venezuela he smears the Bush administration for being oil people. Gee, I never knew Cheney worked for Halliburton, did you?
Posted by: Fred at
February 27, 2006 2:05 PM [link]
I don't think the argument is that simple. Here is an interview that explains the complexities.
It is a 45 minute interview.
i see bio/med., internet and exchanges looking ok...anybody see other sector movement upward?
Posted by: Bullring![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
February 27, 2006 12:54 PM [link]