Money

Shanghai crude oil futures jump more than 6%

March 27, 2018 07:13·
Oil prices find support in trade talks and Mideast tensions

Oil prices find support in trade talks and Mideast tensions

China has introduced yuan-denominated crude oil futures.

In strict accordance with its initial plan, China launched yuan-denominated oil futures on the Shanghai International Energy Exchange on March 26, thus challenging the dominance of the Brent and West Texas Intermediate (WTI) benchmarks.

China's desire to open a domestic market to trade futures has grown as the country's crude imports have boomed. Gasoline and distillate inventories also fell last week.

While the nation hopes to establish a benchmark for global oil transactions, whether the Asian nation would achieve that goal has been the subject of hot debate.

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.

But experts are highly skeptical that the new Shanghai market will quickly gain the clout of an worldwide benchmark.

On the other hand, the scholar predicted that once China's futures market becomes "more mature and transparent", the Shanghai oil futures contract will emerge as a full-fledged benchmark for global oil transactions.

Oil prices find support in trade talks and Mideast tensions

Crude oil is slightly lower today. While seven types of oil produced in the Middle East will be the primary deliveries, Takayuki Homma, head of economic research at Sumitomo Corp. But one crude oil trader said sellers will need to source empty storage tanks, while buyers will not know where they will receive the oil, or which type it will be. This would decrease demand for the greenback and boost US inflation.

Another question is the liquidity of trading.

Chinese authorities have reportedly accelerated the launch amid growing crude imports. Trading may be limited if not enough non-Chinese players take part.

On top of this, the region's trading habits and practices may not change overnight.

The central parity rate of the yuan against the US dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day. Saudi Aramco, the Saudi Arabian national petroleum and natural gas company, determines prices for Asia on the basis of Platts' prices.

In Asia, crude oil is mainly priced against the Dubai, Oman and dated Brent benchmarks or Oman crude futures on the Dubai Mercantile Exchange. The falls came after U.S. President Donald Trump last week signed a memorandum that could impose tariffs on up to $60 billion of imports from China. The market sentiment remains bearish and some steel mills have cut prices, weighing prices.

These and other factors mean the contract may have a "hard time" building correlations with Brent and WTI that would make arbitrage possible, said Albert Helmig, chief executive of financial consultancy Grey House and a former vice chairman of NYMEX. If the first day of trading is any indication, however, this is not the case, at least not for large commodity trading firms.

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