Thursday, February 14, 2013

Oil: "It's a Trap!" (and an opportunity) Now with Transsexuals and Crossdressers

"It's a Trap!"
 -Admiral Ackbar
Return of the Jedi

Someone owes Izabella an apology. She was right in real time and some scoffed.
I saw the headlines on the Glencore/Vitol $10 Bil. loan to Rosneft only yesterday and blew right past, not thinking about what this meant for the term structure of the futures.

Some backstory. On Feb. 12 she posted "A physical vs forward commodity market disconnect" which began:
A strange thing is happening in commodity markets.
As we already commented on Twitter, what the physical supply and demand situation is telling us is getting increasingly disconnected from what the forward and futures markets are saying.
The curve, in short, is feeling mispriced.
And not in the, “oh the market has corrected for too much supply but the forward curve has not caught up” way, but rather in the “physical market in many commodities is still looking weak, if not weaker, yet the curve is going the opposite” way. Weird....
(I followed with a post tangential to her main argument regarding that which is seen and that which is not seen* forward sales by producers)

Today it's "Did you hear the one about Rosneft’s 500m barrel hedge?":
Philip K. Verleger, veteran independent energy consultant, has been doing some sleuthing concerning some of the more opaque areas of the oil market.

What he’s unearthed is interesting, to say the least.

As he noted in a February 11 research report it looks like two trading companies have managed to hedge a $10bn flow of crude to be delivered over five years. What’s really interesting is that they did this without any apparent impact on the oil price. Or as he notes, at least not yet.
From his paper:
The transaction began over Christmas on the ICE market while many reporters and traders were on holiday. While most details are confidential, the arrangement’s broad scope can be discerned from data published by ICE. These numbers indicate that much of the oil was hedged between the start of December and the end of January. The data also make clear that the hedge was done so skillfully that, as yet, no price impact is evident.
The hedge was and is being placed in the ICE Brent contract. In our view, this deal provides convincing evidence that the futures market has reached maturity. (Many would assert the market matured long ago.) From our persective, the absence of a response to the hedge shows the oil market today is far more efficient than world agricultural markets were in 1972 at the time of US grain sales to Russia.
But it gets more interesting…MORE
Read the whole thing and see if you don't think of:

Metallgesellschaft AG and Its Hedging Program
Metallgesellschaft AG: A Case Study
The Case of Metallgesellschaft - Columbia Business School ...
Metallgesellschaft’s Hedging Debacle
Metallgesellschaft: A Prudent Hedger Ruined, or aWildcatter on NYMEX?

I don't mean the mechanics of the trade, hedging long-term exposure via the expiring contract, as I mentioned last month:
If Metallgesellschaft had stuck it out the "stacked front month" hedge would have worked. Management however lost their nerve when faced with multi-billion dollar drawdowns, either the trader hadn't fully explained how the economics worked or mgmt. had said Ja, ja without comprehending....
But rather the fact that, as the punchline to the old joke goes: "There's got to be a pony in there somewhere!"

*I don't know why a dead economist's paper came to mind but it's been happening more and more frequently.
I can't wait for Fisher to show up.

Here's Ackbar via Know Your meme with "It's a trap!":

Know Your Meme says "It didn’t become associated with transsexuals and crossdressers until later, when it reached 4chan."

Say what?