China eyes new oil benchmark with futures launch

Weekly Oil Markets Recap - Running Out Of Toilet Paper

Commodity giants Glencore Plc and Trafigura Group were among foreign participants as the yuan-denominated futures started on the Shanghai International Energy Exchange Monday.

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

Futures contracts allow investors to hedge exposure to physical prices, and offering them in yuan could allow energy-hungry China - which previous 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.

"The market is reacting to news that global trade war tensions are easing and geopolitical risks are escalating, but that doesn't mean concerns have diminished over rising US output and supplies", Will Yun, a commodities analyst at Hyundai Futures Corp., said by phone from Seoul.

Earlier in the session, prices were lifted by statements from Saudi Arabia, the de-facto leader of the Organization of the Petroleum Exporting Countries (Opec), that production cuts that have been in place since 2017 may be extended into 2019, as well as concerns that the United States may re-introduce sanctions against Iran. Brent crude is now above $70.20.

Away from the physical side of things, you need a well-honed market structure that allows producers, consumers and traders to hedge exposure via futures and options.

At 1122 GMT, May WTI crude oil is trading $65.82, up $0.27 or +0.41% and June Brent crude oil is at $69.78, up $0.26 or +0.37%.




Futures for September settlement opened at 440 yuan a barrel, up from a reference price of 416 yuan.

Unipec, trading arm of Asia's largest refiner Sinopec, has inked a deal with a western oil major to buy Middle East crude priced against the Shanghai futures contract, a senior company official said on Monday. Further, the contracts are limited to seven grades that account for only 15% to 20% of China's crude imports.

Nickel was the last major commodity to be listed there in 2015; within six weeks, trading in Shanghai surpassed benchmark futures on the London Metal Exchange, or LME.

The current positioning across the complex is a classic example of a market that has become "locked" with all traders trying to position themselves the same way.

"As things stand, it is a question of when, not if, the US withdraws from the agreement and fires a fresh sanctions salvo towards the OPEC nation", Stephen Brennock, an analyst at PVM Oil Associates Ltd., wrote about the Iran deal.

Until that changes, Brent and WTI will continue to rule this roost.

In Asia, crude oil is mainly priced against the Dubai, Oman and dated Brent benchmarks or Oman crude futures on the Dubai Mercantile Exchange.

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