Over the course of last week, Russian Prime Minister Vladimir Putin made two huge announcements. First, he stated that trade between Russia and China will be settled in Russian rubles (RUB) and Chinese yuan (CNY). Second, he voiced his belief that the world’s reserve currency should switch to the euro (EUR), or at least include the Eurozone’s currency. Simply extrapolated, the comments imply that Russian oil and refined products will, in the not too distant future, trade on the international market priced in RUB. Even better, if I was a betting man, I would wager that this will be done via an exchange, or exchanges. The global oil and commodity complex is about to dramatically change, with a move to transparent, physically-deliverable exchange trading, in a multi-currency environment.
If you have a look on the Internet for oil for sale, you will find a plethora of companies, or people, or websites, offering huge amounts of crude oil: Saudi Light, REBCO, Bonny Light, Iraqi Crude, Iranian Light, among others. All you have to do is send the seller a Letter of Intent, and they will send you an offer. From there you have to prove that you or your buyer can access the required funds to purchase the oil, against which the seller will give you a Proof of Product. This is all done on a bank to bank transaction basis, in US dollars (USD). It is all very straightforward, and at the end of the process you will be a squillionaire, lying around on a tropical beach somewhere, with a daiquiri in one hand, and a former Miss World in the other. Sounds too good to be true? Of course it is.
The global oil market is fragmented, corrupt, and opaque. It is true that if you look on the Internet, you will find plenty of crude for sale. The problem is though that almost all of the buyers and sellers are just brokers, with no money and no oil, trying to catch the once in a lifetime chance of being involved in a trade upon which they can retire. The process is called “daisy chaining,” which was pioneered by Marc Rich in the 1980s, as a way to hide the true origin of the actual crude. Back then, as now, there were sanctions on trading in Iranian crude, imposed by the U.S. government. Marc Rich, one of the most natural traders the world has ever known, found a way around these irksome sanctions by selling the crude via multiple companies between actual buyer and seller (daisy chaining). Although he ended up in exile in Zug for trading contraband oil, the practice of daisy chaining did not. It is in part the model that has been used to date, and a factor in why the global oil market remains so fragmented.
It is clear that the world is moving into a multi-currency environment. It is not because we dislike the USD, but because the demand for direct trade, like Russia to Europe, Russia to China, Asia to Asia, and similar, does not require the use of the U.S. currency. This means that trade in the international market in RUB, CNY, EUR, and Japanese yen, will dramatically increase. China announced some months ago, that it would prefer if its transactions were settled in CNY, and Russia has added that it would be happy to comply with this structure, with its counterpart being the RUB. To remove the fragmentation from the market, the likely prerequisite would include a shift to government-backed exchange trading of commodities and currency, whereas, in the past, the U.S. Federal Reserve has traditionally played the role of the exchange by keeping track of the trade in USD.
Russia has enormously increased its production of crude oil since the collapse of the Soviet Union. Today, Russia produces about 10 million barrels a day (mn bpd), of which 6 mn bpd is exported, second only to Saudi Arabia. However, in the last 10 years, Russia has invested hugely in refining, and gone from 250,000 barrels per day (bpd) of refined product to 2.5 mn bpd. If Russia and a Middle East producer, like Saudi Arabia, decided to put large quantities of crude and refined product for sale via an exchange in multi-currency structures, it will forever change the oil market for the better and, in so doing, create whole new exchange-traded asset classes for investment.
Exchange trading of oil and refined products in a multi-currency environment will mean that access for oil producing nations will be more equitable, and corruption (via price transfer) will be greatly reduced. This, in turn, will mean a more stable pricing environment. Oil does not need a standard global price, but various crude blends need a standard global pricing model. All the once-in-a-lifetime oil chancers will find new ways to occupy their time, while some will make the move to exchange trading.
Putin’s announcement should have far reaching effects not only for Russia, but for the global oil trading spectrum.
Global Markets are anything but integrated. What if we had a paradigm shift in the way we think, the way we actually do business with each other, between nations. Balanced global trade can only occur if we have transparent, accessible, efficient markets, with standardized contracts and on a standardized platform of global exchange. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is CEO of SBI Markets General Trading LLC, a Dubai-registered trading and advisory company. Barden, 39, has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.