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China's oil futures: what this means for the US

27 March, 2018, 03:11 | Author: Samuel Sharp
  • Oil Holds on to Risk-Driven Gains

Most of China's imported crude (about 600,000 barrels a day) is DME Oman grade, which traded at a discount of about $2.50 a barrel to Brent.

They mainly trade higher-quality light sweet crude oil, while the yuan contracts on the Shanghai International Energy Exchange involve mainly medium-sour crude.

The Shanghai International Energy Exchange held a ceremony to mark the launch. This is the first in Asia and it allows foreign companies to participate, with contracts being settled in renminbi.

"China surpassed the United States to become the world's largest importer of crude in 2017.so [naturally], China would want to play a more active role in influencing the price of crude oil", said Sushant Gupta, research director at energy consultancy Wood Mackenzie, as quoted by Reuters.

"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.

Futures contracts allow investors to hedge exposure to physical prices, and offering them in yuan could allow energy-hungry China -over prices of the type of oil it consumes most.


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 worldwide Brent crude futures.

Futures contracts are used to fix prices today for later delivery, usually within 60 days. This did not stop global commodity trading giant Glencore from buying the Chinese futures on the first day of trading.

The Shanghai contract traded higher than its London and NY counterparts shortly after debuting, at 432.2 yuan (USD 68.43) per barrel for September settlement at around 0145 GMT, according to Bloomberg News.

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

The early involvement of big worldwide traders was a morale boost to the fledging market, but state oil majors like PetroChina and Sinopec are expected to provide a significant amount of liquidity in the long-term.

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.

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