Low IQs, junk food-obsessed Clevon and his mobile home, MetaTrader 4’s inability to price negative oil and China’s liquid currency-based market takeover. What have these got in common?
In this weekly series, I look back on what stood out, what was bemusing, amusing and interesting during my weekly travels, interesting findings within the FX industry and interaction with an ever-shrinking big wide world. This is purely observational and for your enjoyment
Negative equity? Well, oil be damned!
My rant, er, I mean analysis last week which drew attention to the disparity between what we pay for oil related energy products as a consumer and the unprecedented dip into negative equity that crude oil (WTI) has taken recently has stoked a fire (probably not an oil burning one!) among electronic trading industry professionals and traders alike.
Last week, I said that I will never understand why energy products have ever been considered a viable commodity on which futures trading can take place, as they are consumables.
Popular opinion and popular culture is perhaps partially to blame for this, as if it is a type of ‘go with the flow’ stereotyping which places crude oil futures in the suit and tie, traditional and long established world of the astute Chicago futures traders at CME and ICE, thus associating it as a similar environment to equities, stocks and company futures, when really it is a semi-obsolete consumer item.
It is very easy to laugh at the hilariously named “Clevon” from the dystopian movie Idiocracy, pointing out how this low-IQ monster ignores the chaotic mess of his own creation that surrounds his idleness and poverty-ridden lifestyle whilst gorging on endless processed high fructose corn syrup, but of course corn is a commodity too, an object that harks back to the raw material harvesting days of pre-Constitutional North America in which the Mid West was a supply and resource chain for Europe, with Chicago’s exchanges growing up around the yellow fields of maize.
Whilst Clevon, whose IQ is 84, ignores his responsibilities and gorges his buckets of corn syrup infused artificial ‘food’, his highly intelligent antitheses in New York is concerned about the future, sustainability, his career as a top lawyer, keeping everything on the straight and narrow, and of course his own health. He
This plays on the stigmatic presupposition that processed food – usually made with corn – is for the Clevons of this world, and sustainably grown vegetables are not. Yet corn is a commodity, and futures contracts on the produce from smallholdings are not.
Thus, oil is seen as a shirt and tie, belt and braces institutional grade investment, and corn is not. But what’s the difference? Perception, that’s all.
Using the Idiocracy argument, we could perhaps translate that Clevon would live in an uninsulated mobile park home, burn fossil fuels to keep warm in winter and light fires outside, and drive a very old, poorly maintained pickup truck that does 10 miles per gallon, whereas the aforementioned New York-based lawyer Trevor, whose IQ is 138, shown in the dystopian movie as Clevon’s opposite would perhaps drive a Tesla, and live in an ecologically designed brand new apartment in which he contributed to the development of the systems, including app-operated electric air conditioning and heating, and the entire system powered by water or solar energy and backed up with connectivity to a nuclear electricity plant. Clean, silent, ultra efficient, and sustainable.
This is the reason why oil is now so volatile that it has gone into negative equity. It only takes one world disaster – such as all of the national borders closed and uniformed tin soldiers on the streets telling the good hard working people of the world that they have no right to go to work, and that is the end of its value.
Gold, on the other hand, is what people buy when geopolitical events take place. It is a firm and finite precious metal and is not used as fuel, hence even when it is manufactured into intricate jewellery or ornamental artefacts, they themselves become longstanding classics and collectables with appreciating value.
You can turn an object into another object. But you can convert energy from one type of energy into another, and by converting oil into heat energy, the raw material has evaporated, therefore control of resources is a massive part of keeping oil at any value – look at what the OPEC countries have done over the years every time there is conflict. Ration it and hold everyone to ransom. However this time, they cannot, as the whole world is in the same situation for the first time in political history.
Thus, I was approached by John, a London based owner of a fintech company which supplies banks and institutional brokers, who certainly echoes this line of thinking and sees a this as a political opportunity.
He said “For whatever reason, I read your perspective this week. In my opinion, it’s really the petro Yuan that one needs to keep an eye on.
“Until Covid shone the light of harsh economic reality on shale oil costs (breakeven estimated at $48+), the US was beginning to demonstrate oil self-sufficiency which was not what the Saudi’s wanted to see. The Saudi’s are now, very understandably, turning their attention to their biggest customer, China” he said.
“As oil is currently denominated in US$, any oil importing company needs to keep US$ reserves (as they do for dealing with any US$ denominated commodities contract). The petrodollar has supported the US$ as a global reserve currency since the 1940’s” said John.
“If the petroyuan begins to dominate, the argument for Yuan as the reserve currency will grow (albeit communism/lack of transparency) is a barrier to global acceptance). Post the Covid recession/depression it remains to be seen who emerges the stronger and the sooner. Yuan’s claim to the reserve currency crown is growing stronger. Sterling had it for two centuries; the US$ for much of a century. The Euro nations probably need to restructure the EU concept (for long term sustainability) before pitching their hat into the mix. It remains to be seen who the baton passes to next” concluded John.
He may well have a point. I think that by aligning the currency with a consumable product, China can break down the borders by stealth, yet still control its own internal capital flows.
Further comment related to the actual functionality of trading platforms and infrastructure rather than just the market possibilities.
Talk here in London among institutional liquidity providers has amassed, focusing on MetaTrader 4 (and some other platforms) inability to negatively price oil, clearly demonstrating that nobody ever even considered that oil could go past zero value.
“I think it is worth clarifying to retail brokers just how scared they should be about a negative Oil price. Many retail brokers seem to largely be asleep to it, and it’s a total disaster area if it happens again” said our intrepid insider.
“Interactive Brokers lost $88 million on oil trading, you would have thought that this would have woken most people up” he said.
“The market value and concentrating on market dynamics due to the oil price fall is one thing, but this is very specific to retail brokers because if the oil price goes into negative value, MetaTrader 4 cannot handle it, so MetaTraer 4 will cut all clients at $0, but the broker could be filled on their hedge at, for example, $20 which could result in tens of millions of losses. Many are asleep at the wheel because the price has gone up, but it will be back down at those levels at the time of expiry” he said.
Multi asset trading is vital to the diversification of our industry and in order to bring products that interest highly sophisticated traders into the retail electronic trading fold, and to elevate the standards of client bases, and the industry’s remit as a whole, however it certainly seems clear that finite commodities and company futures are tangible assets, whereas oil doesn’t just go up in smoke as a consumer energy product, but has political connotations too.
Wishing you all a super week ahead!