Shanghai Crude Oil Futures Debut

Shanghai Crude Oil Futures Debut

Shanghai Crude Oil Futures Debut

The spread between front-month September delivery futures contract and the second-month October contract stood at a premium of Yuan 3.5/b, maintaining the backwardated market structure since the debut opening at 9 am. WTI's delivery point in Cushing, Oklahoma is hundreds of miles from the ocean, and the USA in any case banned crude oil exports for 40 years until 2015.

Trade tensions appeared to ease a bit on Monday, however, as The Wall Street Journal reported (http://www.marketwatch.com/story/us-china-said-to-be-talking-behind-the-scene-to-avoid-trade-war-2018-03-25) that China and the us have quietly started negotiating to improve USA access to Chinese markets. Seven grades will be deliverable, including Dubai crude, Basrah Light and China's Shengli.

The renminbi's prominence will only grow with China's consumption: demand will increase 30.6 per cent to 753 million tons per year in 2040, according to BP.

The September delivery contracts for Brent and West Texas Intermediate (WTI) varieties were traded at 68.38 United States dollars per barrel and 64.06 USD per barrel respectively. That initially eclipsed volumes traded in the Brent May contract, before Europe's benchmark came alive around 05.00 GMT.

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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.

Bloomberg said September contracts for Brent traded near $68.72 a barrel, and WTI at $64.37. Wood Mackenzie pointed to the precedence from the iron ore and coal markets where China's domestic prices and importing patterns are now treated as reference points for the industry. The contract closed at 429.9 yuan per barrel ($68.22).

Although the exchange will have an overnight trading session to match late European and early US trading, it will close for more than six hours before trade resumes in Beijing. "We take the view that the contract is viable and adds to the crude oil trading value chain, and is here to stay", said Kevin Tan, executive vice president at Singapore-based brokerage Straits Financial Services.

Futures trading would wrest some control over pricing from the main worldwide benchmarks, which are based on dollars. Chinese trader Unipec told Reuters it was the counterparty for the Glencore deal. A primary reason Brent dominates, being used to price about two-thirds of the world's oil, is that nearly every barrel can be shipped from its fields in the North Sea to any port in the world.

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The total turnover amounted to 18.3 billion yuan.

Speculative retail and institutional investors also propped up the launch-day's liquidity, said Chen Tong, Shanghai-based senior crude analyst at First Futures. Crude oil prices strengthened following the news, but recent price action has been more tempered. The minimal price increment is 0.1 yuan per barrel.

Brent crude futures were at $70.24 per barrel, down 21 cents, or 0.3%.

At the end of afternoon session, Shanghai prices were up 3.34 percent at 430.2 yuan, with 40,656 lots traded.

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"It is also worth remembering that, as the world's largest importer of crude, China already has a strong voice in global oil markets", Rushforth said.

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