Crude futures boom amid looming Iran sanctions

China optimistic Shanghai contract will become major intl benchmark

A US decision to re-impose sanctions on Iran is supporting China’s newly established crude oil futures, traders and analysts said.

Since its launching in March, Shanghai crude oil futures have seen a steady pickup in daily trading, while open interest – the number of outstanding longer-term positions and a gauge of institutional interest – has also surged.

The crude oil futures on Tuesday were at 472.20 yuan ($73.4), up 0.77 percent.

Traded daily volumes hit a record 250,000 lots on May 9, more than double the day before, spurred by news of the Iran sanctions.

The jump helped the frontmonth Shanghai futures contract account for 12 percent of the global oil market last week, up from 8 percent in week one.

“The contract is thundering into action,” said Stephen Innes, head of trading for AsiaPacific at futures brokerage OANDA in Singapore.

As the world’s biggest importer of crude oil, China hopes the Shanghai contract will eventually rival international benchmarks Brent and West Texas Intermediate.

The ascent of Shanghai crude is aided by China’s strong demand for oil, with imports hitting a record of 9.6 million barrels per day in April.

China is also the biggest buyer of Iranian crude oil, and the recent boost in trading volume at least in part flowed from the sanctions decision, said Barry White, senior vice president for derivatives in Singapore at financial services firm INTL FCStone.

“The sanctions... can potentially accelerate this process of establishing a third [oil] benchmark,” White said.

China took almost a quarter of Iran’s exports in 2017, leaving both sides exposed to the impact of US sanctions.

Anticipating shortages, speculators helped push the Shanghai contract to a dollar-converted record high of around $75.40 per barrel last week, outpacing gains on rival benchmarks.

“Chinese refiners are worried as costs of purchasing crude rise... and showed a strong interest in using Shanghai crude for hedging in the wake of the sanctions,” said Zhang Huiyao, deputy head of crude with Huatai Futures.