China eyes oil mar­kets restruc­tur­ing with new crude fu­tures con­tract


China is seek­ing to as­sert its grow­ing in­flu­ence on global oil mar­kets with a yuan- de­nom­i­nated crude fu­tures con­tract ex­pected to be launched this year.

At the same time, an­a­lysts warn that the sec­ond- largest oil con­sumer af­ter the United States will strug­gle to com­pete with more es­tab­lished bench­marks such as Lon­don’s Brent North Sea crude and New York’s WTI.

“China is the world’s largest oil im­porter and is go­ing to be­come the largest oil con­sumer in the fu­ture, so it makes sense for the coun­try to be the place for an oil fu­tures ( con­tract) in Asia,” Lin Bo­qiang, di­rec­tor of the Energy Eco­nom­ics Re­search Cen­ter at Xi­a­men Univer­sity, told AFP.

China’s con­sump­tion will ex­ceed that of the United States by 2034, ac­cord­ing to the U. S. Energy In­for­ma­tion Ad­min­is­tra­tion.

The coun­try pro­duced about 4.6 mil­lion bar­rels per day ( mbpd) of oil in 2014, while the coun­try’s av­er­age net im­ports reached 6.1 mbpd.

The in­flu­ence of Asia, and China in par­tic­u­lar, has been grow­ing on in­ter­na­tional com­mod­ity mar­kets in re­cent times.

“China’s vi­sion is to have these com­mod­ity mar­kets priced on its own ex­changes,” said Daniel Colover, as­so­ciate ed­i­to­rial di­rec­tor at price re­port­ing agency Platts.

It is also con­sis­tent with China’s grad­ual moves to­wards greater in­ter­na­tion­al­iza­tion of its cur­rency.

The Shang­hai In­ter­na­tional Ex­change is work­ing on a fi­nal draft to be ap­proved by the China se­cu­ri­ties reg­u­la­tory com­mis­sion be­fore a com­pre­hen­sive mock trad­ing ex­er­cise. Mar­ket par­tic­i­pants ex­pect an of­fi­cial launch by the end of 2015.

Liq­uid­ity Is Key

The ini­tial tar­get of the new con­tract seems to be lo­cal com­pa­nies and for­eign com­pa­nies with large in­ter­ests in China, even if trad­ing will be open to in­ter­na­tional play­ers.

“Part of the rea­son China wants to launch this con­tract is to al­low do­mes­tic hedg­ing” that would pro­tect against lo­cal price volatil­ity, ac­cord­ing to Wik­tor Bielski, global head of com­modi­ties re­search at VTB Cap­i­tal.

But the con­tract could strug­gle with liq­uid­ity, es­pe­cially if it fails to at­tract for­eign in­vestors, as ac­cord­ing to Bo­qiang, “there are not many play­ers on the Chi­nese oil mar­ket, since the sec­tor is highly mo­nop­o­lized.”

The Chi­nese oil sec­tor is dom­i­nated by the coun­try’s na­tional oil com­pa­nies and even if some pri­vate com­pa­nies have emerged, their scope re­mains lim­ited.

“I don’t know why some­one do­ing busi­ness out­side China would be in­ter­ested, given the longer- es­tab­lished, more trans­par­ent and more liq­uid al­ter­na­tives are al­ready avail­able else­where,” said Ju­lian Jes­sop, head of com­modi­ties at re­search group Cap­i­tal Eco­nom­ics.

Two- thirds of the world’s oil is cur­rently priced against the Brent bench­mark.

Mar­ket In­flu­ence

Some gray ar­eas re­main around plans for the con­tract, in par­tic­u­lar the crude which is go­ing to be used as un­der­ly­ing in­stru­ment.

The de­riv­a­tive — or prom­ise to take or make de­liv­ery of a vol­ume of crude at a fu­ture date — will be based on a medium and sour crude, a qual­ity fa­vored in Asia and im­ported mainly from the Mid­dle East. Thus sup­ply will likely con­tinue to be in­flu­enced by ex­ter­nal fac­tors.

“A lot of peo­ple in the in­dus­try — a cross sec­tion of the oil mar­ket, trad­ing houses, oil ma­jors, pro­duc­ers — are keen to see how it be­haves and how it is adopted,” said Colover.

For Bielski, mar­ket adop­tion should not be a ma­jor hur­dle. In fact, vol­umes on the ex­change could de­velop very quickly thanks to re­tail in­vest­ments, he said.

Plans for smaller lot sizes — 100 bar­rels ver­sus 1,000 for Brent — seems to be tai­lored to re­tail in­vestors.

Ac­cord­ing to Bielski, the iron ore fu­tures con­tract on the Dalian Com­mod­ity Ex­change, which in­flu­ences the price of steel, did not trade for the first six months, but vol­umes then “ex­ploded” on the back of “pun­ters” trad­ing.

In China, the amount of liq­uid­ity avail­able to re­tail in­vestors with money is grow­ing faster than the num­ber of prod­ucts they can in­vest in, he added.

“What if that same thing hap­pens to oil? Chi­nese mar­kets are go­ing to be­come more dom­i­nant and more im­por­tantly they are go­ing to ex­port con­ta­gion risk,” pre­dicted Bielski.


In this Dec. 22, 2014 file photo, an Ira­nian oil worker rides his bi­cy­cle at the Tehran oil re­fin­ery, south of the cap­i­tal Tehran, Iran.

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