Thread by @arbedout

A thread on the Shanghai INE crude oil futures, what they represent, what everyone is missing, and why I think they're worth paying attention to.

Let's do this. (Thread 2 of 2!)

The futures contract is not the petroyuan; rather, a functioning futures market for oil priced in yuan is a necessity for any oil producers
to consider delivery in yuan.

And allegedly China - who these days has supplanted the US as the world's largest net purchaser of petroluem products - is pushing for exactly that:

oilprice.com/Geopolitics/In…

Still with me? OK. So, here's the deal: I absolutely believe the Chinese are intent on launching a 'petroyuan'.

Mainly because the chief economist of the ICBC detailed plans to do exactly that in June, in plain English.

globaltimes.cn/content/110837…

So what does this mean? In existing models the petrodollar system only maintains it's stability when there's a single hegemon pricing in a single currency. (A is Arabia, E is Europe, and J is Japan in this citation, if it wasn't obvious...)

The combination of pricing oil exports in sovereign currency and offering development loans in said currency to countries that need help is part of the strategy that the US employed post-Bretton Woods to maintain the strength of the dollar...

... and now China under Jiping is running that exact same playbook, while the US is *still* running it.

Frustratingly, afaict every article, tweet, or blog post I've read on this to date focuses on an incredibly unimportant idea...

"will the petroyuan replace the petrodollar"

WRONG QUESTION.

A question I wish we'd ask instead: the world seems to be sleepwalking into two competing visions of petro-currencies, what's that going to look like given the current state of the world?

The only commentary I can find on this are from goldbugs convinced that this is the moment they've been waiting their whole lives for, and people who (rightly IMHO) think said goldbugs are three Kruggerands short of a full bug-out bag.

I'm not going to tell you to buy gold or that the dollar is dying; that wasn't the point of collecting all this info.

What I will tell you is that the most interesting moments in history tend to occur in moments like these....

- when everyone is talking past each other and no one is paying attention to the slow, steady march of history trampling all over our assumptions, upsetting models that seemed to make sense for decades, right up until they didn't.

Things I'm watching out for: what happens when the first futures contracts are settled at the end of September? Will any strains of crude be added / replaced in the Shanghai INE futures contract? Who's going to be the first to defect and price their exports in yuan?

TL,DR: I'm not short the petrodollar or long the (future, still doesn't exist yet) petroyuan - I'm all in on popcorn.

Fin.