Any day now the Iranian crude oil exchange, also known as the Oil Bourse, will begin trading of the spot crude oil markets. However, there is one major difference between crude oil trading on the Bourse from crude oil trading on the New York Mercantile Exchange; the Bourse will trade crude oil in Euros and not the coveted US Dollar. There is an argument that this is all part of an Iranian plot to destroy the US Dollar, but initially there will be little impact on the Dollar since the amount of volume on the Bourse will not be able to compete with the amount of volume seen in futures trading on the NYMEX or the fully electronic Intercontinental Exchange (ICE). Let’s not forget about the Chicago Mercantile Exchange which on June, 12th will begin the trading of side-by-side futures and options of all of the NYMEX pit traded contracts.
The move to electronic energy futures trading in the US should lead to more liquidity in US Dollar denominated energy trading, and it will help to maintain the instantaneous demand for Dollars. So how will the Bourse compete with these much larger exchanges? First off, creating an electronic financial exchange is not difficult. You need a redundant computer server setup, software for executions and quotes on the exchange, computers or handheld devices for traders to execute on, an internet connection, and a clearing system. Technically speaking, anybody could setup a financial exchange. However, competing with the US markets may not be the intention of the Iranian leaders. What if Iran simply wants the world to know that they no longer need US Dollars as a means for trading major commodities? What if this protest caused global financial exchanges to question the need for a US Dollar denominated crude oil contract?
This is where things could get really ugly. For instance, if the Eurex, a major European futures exchange, were to create a Euro denominated crude oil contract, there is no telling what the impact would be on the US Dollar, not to mention that the US government would have little control over the situation. The implications of such an event would mean an increase in transaction costs for energy companies, due to the currency spread that must now be made up. The higher transaction costs would put upward pressure on crude oil and could hurt consumers and businesses around the world. Major countries, such as those that compose the G8, could use the new Euro crude oil contract to help diversify reserve currency portfolios. A greater need for currencies other than the US Dollar means a falling US Dollar.
The real threat to the US is not from the Iran Oil Bourse but rather the threat of a lack of Dollar confidence that could occur. On the flip side if the governments of the world were to publicly announce their Dollar capitulation that is the time to consider going long the greenback.
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