Global Trading Giants Dip Toes in China Oil Futures on Debut Day

28 March, 2018, 01:12 | Author: Franklin Nunez
  • China's first oil futures off to a flying start as Beijing vies for pricing power

The launch of the yuan-denominated oil futures - China's first commodity derivative open to foreign investors - marked the culmination of a decade-long push by the Shanghai Futures Exchange (ShFE) to give the world's largest energy consumer more power in pricing crude sold to Asia.

Nearly 15.4 million barrels of Shanghai's most-active September contract changed hands in the 2-1/2-hour morning session to 03.30 GMT.

"The oil futures trading start on the exchange in China is an expected and, from our point of view, a positive point in development of the oil market at large".

Long-awaited yuan-denominated futures on the Shanghai International Energy Exchange traded at 427.90 yuan a barrel (US$67.78) for September settlement at 2:13pm, with about 18,540 lots changing hands.

"The rules around trading methodology will be unfamiliar for western houses", said John Browning, chief operating officer of Hong Kong-based futures broker Bands Financial Ltd, which is an approved overseas intermediary for the INE.

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Allowing foreign investors to trade the futures directly is a first for China's commodity markets.

"In the short-term, we believe price fluctuations will reflect domestic crude oil supply and demand".

"If the demand for (yuan contracts) came at the expense of the United States dollar, there is always a chance, however slim, that the Chinese yuan could displace the United States dollar as the main petro-currency".

For other parts of the stock market, sentiment was still soured by fears of full-blown trade war between the United States and China.

Beyond trade concerns, crude was pressured by a rise in the number of active USA oil rigs to a three-year high of 804, implying further rises in production.

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Skeptics argue that hurdles such as capital controls, regulatory risk and market intervention in other Chinese securities have made investors cynical about the prospect of Shanghai futures becoming a regional price-setter.

That's different to worldwide exchanges, like the CME, which uses a ratio based on an investor's traded volume.

Financial oil markets have always been dominated by Europe's Brent and America's WTI, despite Asia being the world's biggest and fastest growing oil consumer, has so far not had a benchmark.

Specific issues for traders include Shanghai's shorter trading hours, split into three slots, with the afternoon session ending at 3:00 p.m. local time (0700 GMT), just before London ramps up.

While both contracts have been gaining, Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Illinois said Brent has outperformed WTI.

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The US military put countering China and Russian Federation at the center of a new national defense strategy recently unveiled. Navy destroyer USS Chafee also sailed close to the Paracels, provoking a stern reaction from the Chinese Defense Ministry.

Shell International Eastern Trading the trading arm of Royal Dutch Shell, was heard to be the seller, said multiple sources that participate in the market, although a Shell spokeswoman declined to comment.

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