Chinese Crude Futures Contract may Become Asian Benchmark
HOUSTON (DTN) --- The new Shanghai crude oil futures contract began trading
last month, supported by growing demand in Asian crude oil markets and
favorable tax treatment by the Chinese government aimed at attracting
international companies, the Energy Information Administration said today in
This Week in Petroleum.
Although North America and Europe each have a widely traded oil futures
contract -- West Texas Intermediate and Brent, respectively -- the Asian market
has yet to develop a widely traded benchmark contract. Some consider the Dubai
Mercantile Exchange's Oman futures contract to be representative of the Asian
crude oil market, but its daily traded volume and open interest have remained
at low levels since its inception in 2007, indicating it is not actively used
among market participants, EIA said.
Perhaps the most significant difference between the Shanghai crude oil
futures contract and WTI, Brent, and Oman benchmarks is that the Shanghai crude
oil futures contract is priced in Chinese yuan (CNY) per barrel (/bbl), EIA
The Shanghai contract's settlement in yuan introduces an element of currency
risk that oil traders previously did not have to consider, the agency said.
Based on the September 2018 contract's April 24 closing price of 440.9 /bbl
and the April 24 USD/CNY exchange rate of 6.31 /$, the Shanghai crude oil
futures price settled at an equivalent of $69.91 bbl. The September 2018
contracts for WTI, Brent, and Oman closed at $66.62 bbl, $72.01 bbl, and $68.85
bbl, respectively, EIA said.
The USD/CNY exchange rate has appreciated 8% during the past year, up from
6.88 /$ on April 24, 2017, EIA said.
The Shanghai contract specifies that several crude oil streams are eligible
for delivery, most of which are produced in the Middle East. All are medium in
API gravity and sour in terms of sulfur content, EIA said. The Oman futures
contract also represents medium and sour crude oils, whereas Brent and WTI
underlie light and sweet crude oils. Unlike the other contracts, Shanghai
futures represent a crude oil for delivery in a demand center distant from
where the crude oil is produced. The other contracts are priced near production
areas, and as a result, the Shanghai futures prices could reflect delivery
costs that are more volatile, EIA said.
The Asia and Oceania region represented more than 35% of global petroleum
and other liquid fuels demand in 2017, an increase from the 30% of petroleum
demand the region represented in 2008, EIA said. Many countries in the region
are dependent on crude oil imports to meet domestic demand. Imports to a select
group of Asia-Pacific crude oil importing countries averaged a record-high 24
million bpd in January. As the crude oil trade in the region grows, a benchmark
futures price that reflects local supply and demand conditions could benefit
market participants in managing price risk, EIA said.
After one month of trading, the Shanghai futures contract for September 2018
delivery already has more open interest and trading volume than the Oman
contract for September delivery, the agency said. The Shanghai futures
contract's open interest is smaller than that for Brent and WTI, but trading
volume has been high compared with the number of contracts outstanding,
indicating a high amount of trading turnover, EIA said.
To attract international companies, China's finance ministry has waived
income tax on commissions earned by foreign investors for three years. Although
this initiative could attract the market participants needed to facilitate
trading in the contract, China's central bank still maintains international
capital restrictions, which could reduce interest for some companies, EIA said.
Soon after the launch, the trading company for Sinopec -- Asia's largest
refiner -- agreed to a one-year deal to purchase crude oil from a European oil
company priced against the new contract.
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