No respect for elders: China's new oil benchmark crushing old-timer Brent

Posted March 28, 2018

China's yuan-denominated crude oil futures have launched in Shanghai, and were up sharply in the first day of trading. As Ciara Lee reports, around 12 million barrels of Shanghai's most-active September contract changed hands in the first 55 minutes of trade - and the buyers weren't just Chinese.

Brent and WTI crude oil futures dipped on Monday as concerns of a looming trade dispute between the United States and China weighed on global markets.

Trading in the yuan-denominated oil futures were launched on the Shanghai International Energy Exchange (INE) on March 26.

Straits said it brokered the first trade for Glencore and cleared the deal through Xinhu Futures. Swiss-based commodity traders Trafigura and Mercuria, U.S. -based Freepoint, and independent refiner Shandong Wonfull were other early participants.

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Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore said there was "considerable resistance" as current or higher prices opened the possibility that even more U.S. shale producers could come back online.

The regulator "has the confidence, resolution and capability to build a sound crude oil futures market", Liu Shiyu, chairman of the China Securities Regulatory Commission said at the Shanghai Futures Exchange before trading got under way.

Brent for May settlement rose to $70.97 a barrel on the London-based ICE Futures Europe exchange.

"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.

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Chinese online newspaper Global Times specified that the Shanghai yuan-denominated crude futures were traded Monday "at 429.9 yuan ($68.30) a barrel for September by the end of the trading day at 3 pm (GMT+8), slightly down from 440 yuan at the start of trading, but still above the preset reference point of 416 yuan by 3.34 percent".

The price of Brent hit $71 per barrel in the middle of January, despite surging production by the United States, which is offset by the production cuts led by the Organisation of Petroleum Exporting Countries (OPEC) and Russian Federation.

It's taken a quarter of a century, but China finally has its own oil futures. Further, the contracts are limited to seven grades that account for only 15% to 20% of China's crude imports. Worries include how to freely exchange the yuan because of a Chinese clampdown on capital outflows, while some concerns remain about Beijing's heavy handed intervention in its commodity markets in recent years, traders and analysts said.

Oil traded above $66 a barrel Tuesday morning as global trade tensions showed signs of easing, countering concerns that USA crude stockpiles may have resumed their expansion last week.

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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.