China launches crude oil futures

29 March, 2018, 01:53 | Author: Gladys Mathis
  • China launches first ever yuan-denominated oil futures contract posts more than 6% jump

US West Texas Intermediate (WTI) crude futures were at US$65.59 a barrel at 0700 GMT, down 29 US cents, or 0.4 per cent, from their previous close.

China is the world's second-largest oil consumer and in 2017 overtook the United States as the biggest importer of crude oil.

Looking further ahead, Wood Mackenzie felt that this would also establish the local regional benchmark for negotiations of spot or term crude oil prices in other markets, such as Japan and South Korea.

"The fact that the government is encouraging the exchange and also is not shy about stepping in to occasionally change the rules may discourage worldwide players", Brown said.

Skeptics argue that hurdles, such as capital controls, regulatory risk and market intervention in other Chinese securities have made investors cynical about the prospect of Shanghai futures becoming a regional price setter.

Initially, U.S. dollars may be used as deposit and for settlement, and in the future, more currencies will be used as deposit.

Last year, China became the world's biggest buyer of foreign oil, surpassing the U.S. Yuan-denominated contracts are expected to boost the use of yuan in worldwide trade in the long run.

Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore, said there was "considerable resistance" to extending the deal as current, or higher, prices could entice even more USA shale producers to come back online.

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Yang Xiaoping, president of BP China, said China's crude oil futures offer companies in the real economy a hedging tool that can better reflect market conditions in Asia.

"The. trade war story. should be taken into account when trying to quantify the potentially bullish effect of the geopolitical element in oil markets", said analysts at consultancy JBC Energy.

The long-awaited step evoked a surge in global prices for oil with Brent Crude soaring to $71 a barrel for the first time since 2015.

McKenna said he hoped Shanghai crude "gets a lot of traction and we end up with three established global benchmarks", but he cautioned that "the first couple of days have been volatile".

U.S. shipments, which benefited from OPEC supply cuts and rebounding crude oil prices, averaged 153,000 bpd a year ago.

The contract for delivery in September opened about 6 per cent higher at 440.20 yuan (US$69.70) a barrel at 9:01am.

WTI is now trading above $64.60.

Since Shanghai crude oil futures were launched on March 26, it would have been profitable to buy the spread between Brent and Shanghai crudes, which has risen from $1.6 per barrel on Monday to $4.6 on Wednesday, while shorting the Shanghai premium over WTI, which has narrowed from $3.1 a barrel on Monday to just 30 cents on Wednesday.

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