Shanghai crude futures eat into Western benchmarks

SINGAPORE: The launch of China’s first crude futures contract in Shanghai has added a long-awaited Asian benchmark to the global oil sector, challenging the dominance of Western price-markers and threatening ramifications far beyond the energy industry.

Since their launch in March 2018, Shanghai crude futures have stolen market share from the incumbent benchmarks – Europe’s Brent and US West Texas Intermediate (WTI) – which trade oil derivatives worth trillions of dollars every year.

Volumes have also far bypassed other crude futures, such as those that the Dubai Mercantile Exchange (DME) launched in 2007 with the goal of creating a Middle East/Asian price benchmark.

This shift in oil markets could have far-reaching implications, including in foreign exchange markets.

“It’s significant. Given the prominence of China in oil markets, we could see more use of the Shanghai contract,” said Stephen Innes, head of Asia-Pacific trading at futures brokerage OANDA in Singapore.

He said foreign exchange markets were also “taking notice of any yuanification.”

Since launching in late March, front-month volumes in Shanghai crude futures have risen to trade almost 2.8 million lots of 1,000 barrels in July.

This gave the contract a market share for July of 14.4 per cent, compared with 28.9 per cent for Brent and 56.7 per cent for WTI crude futures.

“Shanghai crude has good liquidity due to its high volatility and its correlation with international oil futures. It has become a good investment for speculators,” said Zhang Huiyao, Deputy General Manager for crude oil trading at Huatai Futures in Guangzhou.

Despite this early success, operator Shanghai International Energy Exchange is playing it cool.

“China’s crude oil futures remain... behind the mature contracts in Europe and the US,” President Jiang Yan told Chinese media this month.

“For the contract to have greater impact, it requires... greater participation by foreign companies,” he said.

Zhang Huiyao of Huatai Futures said more industrial players and pure trading companies would also help.

It’s significant. Given the prominence of China in oil markets, we could see more use of the Shanghai contract. Stephen Innes, head of Asia-Pacific trading

— Reuters photo People attend the launch ceremony of Shanghai crude oil futures at the Shanghai International Energy Exchange in Shanghai, China.The launch of China’s first crude futures contract in Shanghai has added a long-awaited Asian benchmark to the global oil sector, challenging the dominance of Western price-markers and threatening ramifications far beyond the energy industry.