China launches crude oil futures

Author

27 March, 2018

North Sea Brent Crude surged above $71 per barrel for the first time since 2015 before retreating, though still trading strongly above $70 for only the second time in over three years. According to observers, the country's yuan-denominated oil contracts could emerge as a brand new benchmark, providing Beijing with extra pricing powers and help it internationalize the yuan.

Long-awaited yuan-denominated futures on the Shanghai International Energy Exchange traded at 427.90 yuan a barrel (US$67.78) for September settlement at 2:13pm, with about 18,540 lots changing hands. This is the first in Asia and it allows foreign companies to participate, with contracts being settled in renminbi.

"Prices assessed at the Shanghai exchange will reflect China's crude supply and demand", said Sushant Gupta, research director at energy consultancy Wood Mackenzie. China imports about 600 kb/d of Oman crude.

China's launch on Monday of its crude futures exchange will improve the clout of the yuan in financial markets and could threaten the worldwide primacy of the dollar, argues a new report by Hayden Briscoe, APAC head of fixed income at UBS Asset Management.

Trading of Brent futures on the Intercontinental Exchange (ICE), however, is usually most active after London opens around 0700 GMT. Both futures contracts are commonly used by financial traders.

Straits said it brokered the first trade for Glencore and cleared the deal through Xinhu Futures.

The country also hopes that yuan-denominated futures contracts will help its currency play a bigger role in the global economy.

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Liquidity was driven by speculative retail and institutional investors, said Chen Tong, Shanghai-based senior crude analyst at First Futures.

Crude oil futures slipped on Monday, but losses were capped by a rebound in stock markets and escalating Saudi-Iran tensions.

Nevertheless, the existing price benchmarks - Brent and WTI crude - are both in dollars, and importers across the world must buy dollars in order to conduct oil deals.

Brent and WTI, in contrast, were down by that time, weighed down by concerns over a looming US trade dispute with China.

The September crude futures contract, or SC1809, jumped to above Yuan 440/b ($69.63/b) at the opening, up by Yuan 24/b or 6% from its starting price of Yuan 416/b set by the INE.

On the other hand, experts forecast this nation could even change radically the rules of the game in the oil market by giving sellers of raw materials the opportunity to avoid the obligation of using the greenback and to buyers of having to pay with youans or gold.


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