China launches oil futures to stake claim on its own benchmark
Contract promotes renminbi use and focuses on ‘sour’ crude favoured by local refiners
Tom Hancock in Shanghái
Benchmark wanted: A Chinese flag flutters in front of a Shanghai refinery. The country launched renminbi-denominated oil futures, focused on the high-sulphur crude favoured by domestic refineries, partly to establish a global price standard © AFP
China launched its long-delayed renminbi-denominated oil futures on Monday, as it establishes a pricing benchmark in the type of high-sulphur crude favoured by its refineries, wresting some control from Brent, the global oil standard, and US benchmark West Texas Intermediate.
The contract is the first Chinese futures product that can be traded by overseas entities without a presence in China, representing Beijing’s latest step towards financial opening and to promote global use of its currency.
China overtook the US as the world’s largest oil importer last year, but the main oil benchmarks are determined in London and New York. The contracts launched in Shanghai on Monday are for delivery of the type of “sour” (high-sulphur) crude mainly consumed by Chinese refineries, for example Basra Light and Oman Blend.
“It’s a fairly natural progression that there is a benchmark in Asia denominated in renminbi,” said David Martin, Asia-Pacific head of global clearing at JPMorgan.
Six of the seven oil grades referenced in the futures are from the Middle East, with the other from China. Gulf countries “could be handing pricing power to their major buyer,” one industry executive said before the launch of the contract.
BMI Research, a market analysis group, said in a commentary that China’s new oil futures could also affect crude spot prices in Japan and South Korea. “There is a precedent from the iron ore and coal markets where China’s domestic prices and importing patterns are now treated as reference points for the industry,” it said.
Li Qiang, Shanghai’s Communist party chief and Liu Shiyu, head of China’s securities regulator, banged a gong at the Shanghai Futures Exchange to launch trading on Monday morning, following speeches heavy with party slogans.
First day liquidity saw turnover of more than Rmb17bn ($2.7bn), officials said. Prices for delivery in September closed down 2.7 per cent from the opening price to Rmb428 ($68) a barrel.
The Shanghai International Energy Exchange (INE), the unit of the Shanghai exchange that oversees trading of the futures, has offered incentives for overseas investors such as tax holidays and exemptions from capital controls.
INE has allocated a total storage capacity of 37.42 million barrels at six sites along China’s coast. Although not large, this storage will facilitate price assessments and could act as a hub for re-exports since the designated storage is located in free-trade zones.
But analysts warned that the quirks of Chinese markets could discourage foreign investors. China maintains tight capital controls, with some companies finding it difficult to move money out of the country. Beijing has a record of market intervention, while settlement in renminbi adds to currency risks.
“The Chinese oil market is heavily state-led . . . As such, there are valid concerns over the potential for price squeezes or distortions,” BMI said.
There are other hurdles, such as idiosyncratic trading times and the fact that Chinese futures are prone to speculative bubbles and their liquidity is concentrated in specific months.
“In the short term, we do not expect material movements of volumes to the Shanghai exchange from other established exchanges such as Nymex and ICE,” consultancy Wood Mackenzie said in a note.
At least 10 foreign entities have registered to trade the contract including JPMorgan, Bands Financial and Straits Financial Services. Regulatory hurdles mean “there will be a gentle start for foreign investors,” Mr Martin added.
Additional reporting by Yizhen Jia in Shanghai and Anjli Raval in London
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