120 comments on Financial Intelligence: How Arbitrage Forensics Provide Insight into Saudi Knowledge
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I also don't think it is correct to use the risk free rate to discount Saudi's cash flows.
The discount rate should be Saudi's cost of capital, or the return they would get on the next best investment with a similar risk profile. Storing a volatile commodity is hardly risk free, even though Saudi may have special knowledge and ability to influence the price. I would be an interesting exercise to try to calculate an appropriate cost of capital for this investment. There are an awful lot of factors involved. I would guess a reasonable estimate would be more like 7-8%.
the debate is meaningless. The saudis don't hedge. Neither does Exxon or any of the other majors on their forward crude production. The sellers down the curve are smaller players that have high cost production and banks eager to make sure their loans get paid.