Published: Tue, March 27, 2018
Finance | By Jaime Brady

Shanghai crude oil futures roar into action

Shanghai crude oil futures roar into action

China, the world's largest oil importer, is hoping that the yuan-denominated futures will help create a benchmark that reflects Asian markets better than the dominant Western indices Brent crude and West Texas Intermediate.

China's launch on Monday of its crude futures exchange will improve the clout of the yuan in financial markets and could threaten the worldwide primacy of the dollar, argues a new report by Hayden Briscoe, APAC head of fixed income at UBS Asset Management.

Overseas investors can invest in the futures contracts through various means.

This could mean the contract risks having to play catch-up each morning to the moods and swings of Europe and America, rather than setting its own price, several senior futures traders said. In essence, backwardation typically signals strong demand and the structure occurs when market participants are expecting prompt prices to outpace future prices. As Ciara Lee reports, around 12 million barrels of Shanghai's most-active September contract changed hands in the first 55 minutes of trade - and the buyers weren't just Chinese. The contracts, which are open to foreign investors, end years of delays and setbacks since China's first attempt to list the securities in 1993. According to the Shanghai International Energy Exchange data, 19 foreign brokers have registered for oil contracts during the last week.

Futures contracts allow investors to hedge exposure to physical prices, and offering them in yuan could allow energy-hungry China - which past year surpassed the United States as the world's largest crude importer - to exercise more control over prices of the type of oil it consumes most.

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While it remains to be seen whether they're in it for the long haul, the participation of Glencore, Trafigura and other foreign investors in the contract's debut is a boon. "[The new futures market would help enhance our] risk management ability against worldwide oil price volatility", said Dai Houliang, vice chairman and president of Sinopec in Hong Kong Monday. The benchmark prices of 15 listed contracts were set at 416 yuan (65.8 US dollars), 388 yuan and 375 yuan per barrel, depending on delivery date.

Trading will resume at 1:30 p.m. Independent refiner Shandong Huifeng Petrochemical did too.

The jump came after Brent futures for May delivery opened above $70 per barrel for the first time since January on expectations OPEC-leader Saudi Arabia may extend supply cuts into 2019, as well as over concern that the United States may re-introduce sanctions against Iran.

Meanwhile, crude futures that were tested in Singapore and Japan have since faded to obscurity due to low liquidity. Some 18,540 lots have reportedly been sold and purchased so far.

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