From Reuters
BEIJING/SINGAPORE (Reuters) – China’s crude futures kicked off to a roaring start on Monday as western traders and Chinese majors eagerly traded the world’s newest financial oil instrument, which many expect to become a third global price benchmark alongside Brent and WTI crude.
Global commodity trader and miner Glencore (GLEN.L), and big merchants Trafigura [TRAFGF.UL], Freepoint Commodities and Mercuria were among the first to trade the new contract, even as concerns remain that smaller overseas investors may struggle with unfamiliar rules and complex regulation.
The launch of the yuan-denominated oil futures – China’s first commodity derivative open to foreign investors – marked the culmination of a decade-long push by the Shanghai Futures Exchange (ShFE) to give the world’s largest energy consumer more power in pricing crude sold to Asia.
China is the world’s second-largest oil consumer and in 2017 overtook the United States as the biggest importer of crude oil. Its demand is already a key determinant of global oil prices.
With major overseas traders displaying a strong appetite to punt in China’s vast derivatives market, Shanghai’s turnover challenged Brent volumes during Asian hours, reflecting the potential for arbitrage trade with oil markets in the United States, Europe and Oman.
“Whether this will have any real bearing on the other crude benchmarks, I’m not quite sure, but traders love a new toy, so I applaud China for bringing in something that could stoke up some volatility,” said Matt Stanley, a fuel broker with Freight Investor Services (FIS) in Dubai.
First-day enthusiasm saw 20 million barrels of September oil changing hands in Shanghai by the 3:00 p.m. (0700 GMT) close, but it’s not clear the pace will hold in the night session, which runs from 9:00 pm to 2:30 am, or on into coming days.
The 15.4 million barrels done in Shanghai’s 2-1/2-hour morning session initially topped the Brent May crude contract, before Europe’s benchmark came alive around 0500 GMT .
“We’ve seen already this morning it appears to be a liquid contract from the off,” said David Martin, JPMorgan Chase & Co’s Asia Pacific head of global clearing, at an event for the launch in Shanghai.
ARBITRAGE ATTRACTION
Analysts said western oil traders were attracted to Shanghai’s oil contracts for the potential arbitrage between China’s market specifics and global oil fundamentals as reflected by U.S. West Texas Intermediate (WTI) and international Brent crude futures .
WTI crude is the main benchmark for U.S. crude grades and a crucial hedging tool for the U.S. oil industry. Brent is priced off of North Sea oil and is a primary value marker for Europe, Africa and Middle East crudes. Both futures contracts are commonly used by financial traders.
“Prices assessed at the Shanghai exchange will reflect China’s crude supply and demand,” said Sushant Gupta, research director at energy consultancy Wood Mackenzie.
Despite the first-day success, the yuan-denominated trading and a blend of new rules and regulatory burdens could in the long-run hamper sustained take-up on the Shanghai International Energy Exchange (INE), executives at a dozen banks and brokers and experts involved in the launch told Reuters.
Still, China offers the potential for a deep, liquid market, buoyed by an explosion of interest from mom-and-pop investors that has supported its vast commodities derivative markets from apples to iron ore in Shanghai, Zhengzhou and Dalian.
The yuan-denominated contract will also help Beijing’s efforts to internationalize the nation’s currency, said Woodmac’s Gupta.
WESTERN MERCHANTS ACTIVE
A surprise to many was that Glencore executed Shanghai’s first crude deal. Swiss-based commodity traders Trafigura and Mercuria, U.S.-based Freepoint, and independent refiner Shandong Wonfull were other early participants.
“Glencore’s first bid reflected the high participation and enthusiasm of foreign traders for Chinese crude oil futures,” said Yang Xidong, general manager of Xinhu Futures Co Ltd.
“We were active with Glencore today and I’ve seen Trafigura in it and Freepoint … We take the view that the contract is viable and adds to the crude oil trading value chain, and is here to stay,” said Kevin Tan, executive vice president at Singapore-based brokerage Straits Financial Services.
Straits said it brokered the first trade for Glencore and cleared the deal through Xinhu Futures. Chinese trader Unipec told Reuters it was the counterparty for the Glencore deal.
The early involvement of big international traders was a morale boost to the fledging market, but state oil majors like PetroChina (601857.SS) and Sinopec (600028.SS) are expected to provide a significant amount of liquidity in the long-term.
Unipec, trading arm of Asia’s largest refiner Sinopec, has inked a deal with a western oil major to buy Middle East crude priced against the Shanghai futures contract, a senior company official said on Monday.
This could be seen as competition to the Dubai Mercantile Exchange’s (DME) crude futures and potentially the assessments published by price reporting agency S&P Global Platts (SPGI.N).
Speculative retail and institutional investors also propped up the launch-day’s liquidity, said Chen Tong, Shanghai-based senior crude analyst at First Futures.
“In the short-term, we believe price fluctuations will reflect domestic crude oil supply and demand. In the long run, yuan crude price will mirror the moves of Brent,” he said.
TALE OF THE TAPE
The most-active September ISCU8 contract opened at 440.4 yuan ($69.78) per barrel versus a reference point of 416 yuan, jumping as high as 447.1 yuan ($70.85) in the first few minutes.
The jump came after Brent futures for May delivery opened above $70 per barrel for the first time since January on expectations OPEC-leader Saudi Arabia may extend supply cuts into 2019, as well as over concern that the United States may re-introduce sanctions against Iran.
At the end of afternoon session, Shanghai prices were up 3.34 percent at 430.2 yuan, with 40,656 lots traded.
Brent and WTI, in contrast, were down by that time, weighed down by concerns over a looming U.S. trade dispute with China.
Chinese exchanges count each side of a trade – the buy and the sell – as two lots, meaning the total oil changing hands was 20,328 lots, equal to 20.3 million barrels.
China’s Oil Futures Launch May Threaten Primacy of U.S. Dollar: UBS
From Reuters
NEW YORK (Reuters) – China’s launch on Monday of its crude futures exchange will improve the clout of the yuan in financial markets and could threaten the international primacy of the dollar, argues a new report by Hayden Briscoe, APAC head of fixed income at UBS Asset Management.
“This is the single biggest change in capital markets, maybe of all time,” Briscoe said in a follow-up telephone interview.
The launch of the oil futures denominated in China’s renminbi currency, also known as the yuan, is China’s first commodity derivative open to foreign investors. This marked the culmination of a decade-long push by the Shanghai Futures Exchange (ShFE) to give the world’s largest energy consumer more power in pricing crude sold to Asia.
Already on Monday, Unipec, the trading arm of Asia’s largest refiner Sinopec, has inked a deal with a western oil major to buy Middle East crude priced against the newly-launched Shanghai crude futures contract.
This helps cement the exchange’s viability and challenges the petro-dollar system, in which oil deals are executed in dollars. This would decrease demand for the greenback and boost U.S. inflation.
China surpassed the United States in 2017 to become the world’s largest oil importer. 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.
But the move to trade oil in yuan will diminish the role of the greenback in global financial markets, argues Briscoe.
Pricing oil in renminbi and launching a trading hub will raise China’s prominence and integrate it further in global markets. And demand for yuan from foreign investors eager to participate in the Shanghai International Energy Exchange will boost the currency’s value and divert trading away from the dollar. Appetite for dollars would shrink, driving the price of the currency down.
The renminbi’s prominence will only grow with China’s consumption: demand will increase 30.6 percent to 753 million tons per year in 2040, according to BP. This power will let China bypass the petro-dollar system and demand that its oil purchases be priced in yuan, as seen in Monday morning’s Unipec deal. This may be even more likely in deals in which China has outsized leverage, such as their offer to buy 5 percent of Saudi Aramco.
As it stands, oil exporters store the revenue from their U.S. oil sales in Treasury bonds – a process known as “petro-dollar recycling.” As a result, the rise of the petro-yuan would also jeopardize a key source of financing for U.S. deficit spending.
Sinopec Traders Ink First Deal to Buy Oil Priced Off Shanghai Crude Futures
From Reuters
SINGAPORE (Reuters) – Unipec, the trading arm of Asia’s largest refiner Sinopec, has inked a deal with a western oil major to buy Middle East crude priced against the newly-launched Shanghai crude futures contract < 0#ISC:>, a senior company official said on Monday.
Hong Kong-based Unipec Asia will buy the crude delivered to China for one year starting from September, said the source who declined to be named due to company policy. He declined to comment on the counterparty and the purchase volume.
Several market sources said Shell International Eastern Trading Co, the trading arm of Royal Dutch Shell (RDSa.L), was believed to be the seller. Shell declined to comment.
The deal will help cement the viability of China’s first crude futures contract, as the world’s largest oil importer hopes to create a benchmark to rival global price markers Brent <0#LCO:> and West Texas Intermediate (WTI) <0#CL:>.
“We believe the (Shanghai) contract will have a big impact on oil pricing in Asia,” the Unipec official said.
“The timing is good as China has opened up the market for independent refiners to import crude,” the source said. “We hope it will be successful.”
Also on Monday, the state refiner launched a Shanghai trading desk dedicated to trading INE crude, with a team of about seven people that is expected to grow, a company official said, without giving further details.
The high trading volumes for the Shanghai crude contract on its first day, which challenged those of international benchmark Brent during Asian hours, surprised market participants as western commodity merchants and Chinese oil firms both traded actively.
More than 15 million barrels per day of Middle East and Russian crude exported to Asia are currently priced using the Dubai and Oman benchmarks assessed by price reporting agency S&P Global Platts (SPGI.N) and the Oman crude futures on the Dubai Mercantile Exchange (DME) <0#DUBSGEFS:>.
“The liquidity for Shanghai crude futures will surpass that of DME,” he said, providing an alternative price marker for oil deliveries in China.
The DME declined to comment.
