Streetwise Professor

December 22, 2014

CFIUS to Rosneft: You Can Do What You Like, Just Don’t Do It Here*

Filed under: Commodities,Derivatives,Economics,Energy,Russia — The Professor @ 7:29 pm

Bowing to the inevitable, Rosneft and Morgan Stanley scuppered their agreement to sell MOST’s energy trading operations to the Russian company. The official explanation was that the deal failed to get approvals from US regulators.

Go figure.

Glad that the Committee on Foreign Investment in the United States,which consists of Treasury, Justice, Homeland Security, Defence, State, Commerce, the US Trade Representative and the Office of Science and Technology Policy, saw off Igor and Co. Putting the FU in CFIUS.

That said, even if the regulatory approvals had been forthcoming, I don’t see how the deal would have worked. As I wrote in September, I didn’t see how a company without access to long term dollar credit (due to sanctions) could operate economically such a credit-intensive business as oil trading. Hell, today Rosneft’s other big announcement was that it paid off some loans it took on when it acquired TNK-BP. When a company announces a loan repayment like it’s some sort of triumph, you know that they aren’t in any position to buy and run a trading business.

Put differently, if CFIUS hadn’t have gotten Rosneft, the sanctions would have.

This might actually be a blessing to Morgan Stanley. The current high volatility, contango, low price environment is actually quite favorable for trading. Low prices reduce working capital needs. Contango makes for profitable storage opportunity. Volatility creates trading opportunities. MOST might actually get more now than Rosneft had agreed to pay.

*Title inspired by Springsteen’s Blinded by the Light.

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  1. When and if you have time – what is contango, please?

    Investopedia defines it thusly:

    DEFINITION of ‘Contango’

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity. This may be due to people’s desire to pay a premium to have the commodity in the future rather than paying the costs of storage and carry costs of buying the commodity today.

    Comment by elmer — December 24, 2014 @ 10:13 am

  2. @elmer-Contango is where the futures price (e.g., the price of oil for delivery in March, 2015) is above the spot price (the price for immediate delivery). Since spot prices are not readily observable, the next to expire futures contract (which for oil would now be the February, 2015 contract) is used instead. In contrast, a “backwardation” is where the spot price is above the futures price. At present, February Brent is 60.11 and March Brent is 60.88: that’s a contango.

    The definition there is confusing, and the confusion can be traced back to Keynes. The futures price is *NOT* necessarily equal to the expected spot price. In fact, rather than try to undo all the idiocy in that definition, it would be easier that you erase it from your mind. That definition is related to the concept of a risk premium. Essentially, Keynes stole market nomenclature that described the relationship between observable things (the spot price and the futures price) and used it to describe a relationship between an observable (the futures price) and a mathematical construct that is not observable (the expected spot price).

    I spend about 45-60 minutes every semester trying to make sure my students don’t get confused by what Keynes did.

    When the market is in contango, there is a positive gross margin to storing the commodity. I can buy oil at 60.11, sell futures for March delivery at 60.88, and get a gross margin of $.77. Net margins deduct interest and storage costs.

    The ProfessorComment by The Professor — December 24, 2014 @ 12:53 pm

  3. thank you

    Comment by elmer — December 25, 2014 @ 11:23 am

  4. @elmer-you’re welcome.

    The ProfessorComment by The Professor — December 25, 2014 @ 2:39 pm

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