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China launches crude oil futures

China launches crude oil futures

China's yuan-denominated crude oil futures have launched in Shanghai, and were up sharply in the first day of trading.

The oil market has been supported by concerns about possible disruption to Middle East supply, though strong global output has tempered the bullishness somewhat, particularly with both Brent and US crude benchmarks trading near highs last seen in late February.

In strict accordance with its initial plan, China launched yuan-denominated oil futures on the Shanghai International Energy Exchange on March 26, thus challenging the dominance of the Brent and West Texas Intermediate (WTI) benchmarks.

Straits said it brokered the first trade for Glencore and cleared the deal through Xinhu Futures.

"We prefer to watch for a while", said one Weifang-based independent refiner.

China's foreign ministry said on Monday Beijing is willing to hold talks with the United States to resolve their differences in a hopeful sign a potentially damaging trade war could be avoided.

Beyond trade concerns, crude was pressured by a rise in the number of active United States oil rigs to a 3-year high of 804, implying further rises in production.

According to Wood Mackenzie, the impact will be felt on the pricing of crude oil from Iran and Oman, the current largest suppliers to China.

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"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. This power will let China bypass the petro-dollar system and demand that its oil purchases be priced in yuan, as seen in Monday morning's Unipec deal.

Futures for September settlement opened at 440 yuan a barrel, up from a reference price of 416 yuan. The biggest risk was that the USA could re-introduce sanctions on Iran.

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.

Oil prices were little changed on Tuesday. By 11:14 a.m. (0314 GMT), 3,599 lots of the most-active June contract had traded, equivalent to 3.6 million barrels of crude.

Shanghai Crude aims to rival the world's two crude benchmarks, luring overseas traders with the promise of a deep pool of liquidity and the chance for arbitrage between Asian, U.S. and European markets.

The Chinese government would rather have a slightly slower or softer launch so it doesn't have to intervene early on in a market that's bubbling too quickly, said Michal Meidan, an analyst at industry consultant Energy Aspects Ltd.

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.

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