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China aims to challenge Brent, WTI oil with crude futures launch

27 March, 2018, 18:57 | Author: Sara Gill
  • Reuters

The highly anticipated yuan-backed crude oil futures have been launched in Shanghai.

China is the world's largest importer of crude oil, and the introduction of crude oil futures contracts represents a milestone for China's futures market, said David Martin, Asia Pacific Head of Global Clearing at J.P. Morgan.

The contracts, which are open to foreign investors, end years of delays and setbacks since China's first attempt to list crude oil futures in 1993.

"China surpassed the USA to become the world's largest importer of crude in 2017".

On the other hand, China is not leaving everything to market forces.

Analysts expected sufficient demand for the crude futures contracts from both industrial and financial clients as they needed a tool to manage risk, and hedge against inflation.

The contract for delivery in September opened about 6 per cent higher at 440.20 yuan (US$69.70) a barrel at 9:01am.

But analysts said the long-delayed Shanghai-traded futures are unlikely to challenge the primacy of NY and London-based futures any time soon due to Chinese capital controls and the entrenched position of the dollar-denominated contracts. About 20,300 contracts changed hands over the course of the day, which excluded an additional 5 1/2 hours of overnight trading. According to the Shanghai International Energy Exchange data, 19 foreign brokers have registered for oil contracts during the last week.


The admission of foreign investors directly to futures trading occurs for the first time in Chinese commodity markets. Such obstacles kept foreign investors away from the major stock and bond markets in the mainland.

Meanwhile, Wood Mackenzie said in a note that the impact of Shanghai crude futures on global crude prices will be marginal if there is not enough liquidity.

"It's hard to see it becoming a major driver of oil prices in the short to medium term", said Daniel Hynes, a senior commodities strategist at Australia and New Zealand (ANZ) Banking Group.

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

"President Donald Trump continues to suggest the U.S. will pull out from (the) Iran nuclear deal, which raises the spectre of bringing back sanctions on the country and severely limiting Tehran's ability to export crude oil", said Stephen Innes, head of trading for Asia/Pacific at futures brokerage OANDA in Singapore.

With one eye on success, the authorities are also wary of any potential bubbles created by the millions of wealthy retails investors living in the world's second-largest economy.

Concerns of a looming trade dispute between the United States and China had also weighed on global markets.

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