China Eyes New Oil Benchmark with Futures Launch

China launched yuan-denominated oil futures contracts on Monday (Mar 26). marking the first time foreign investors will have access to Chinese commodity futures as the world`s top crude importer seeks greater influence over global prices.

But analysts said the long-delayed Shanghai-traded futures are unlikely to challenge the primacy of New York and London-based futures any time soon due to Chinese capital controls and the entrenched position of the dollar-denominated contracts.

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

It also is the latest in a series of steps by China to raise the world profile of the yuan.

The new contracts are `rooted in China`s ambition to increase its bargaining power to price energy supplies amidst an increasing reliance on oil imports.` energy industry information provider ICIS said in a research note.

`If the demand for (yuan contracts) came at the expense of the US dollar. there is always a chance. however slim. that the Chinese yuan could displace the US dollar as the main petro-currency.`


But analysts said Chinese capital controls will likely discourage hefty foreign engagement. as will wariness of the often wild gyrations in China`s still relatively immature financial markets.


`For now there is more curiosity than actual interest in participating in the contract.` Michal Meidan. a London-based analyst with Energy Aspects. told AFP.

`Over time … it could become at least a domestic Chinese benchmark. But for it to become a global benchmark – we are a way away from that.`

The current global standards are London-trade Brent futures. and West Texas Intermediate (WTI). which is traded in New York.

They mainly trade higher-quality light sweet crude oil. while the yuan contracts on the Shanghai International Energy Exchange involve mainly medium-sour crude.

The Shanghai contract traded higher than its London and New York counterparts shortly after debuting. at 432.2 yuan (US$68.43) per barrel for September settlement at around 0145 GMT (9.45am Singapore time). according to Bloomberg News.

Bloomberg said September contracts for Brent traded near US$68.72 a barrel. and WTI at US$64.37.

China has already taken steps that it hopes will help to internationalise its currency.

Last July it widened foreign access to its US$10 trillion bond market – the world`s third-largest after the United States and Japan – and in recent years has allowed link-ups between the stock exchanges of Hong Kong and mainland China that allow foreign and Chinese investors to buy shares listed on each other`s markets.

But foreign investor response to those openings has been tepid. and while analysts say the yuan oil futures will help further internationalise China`s markets and increase crude price transparency in Asia. the dollar`s position as the world`s petro-currency remains solid.

The existing benchmarks are `highly liquid. (have) been trading for decades. denominated in US dollars and include a large portion of physical deliveries.` said Jonty Rushforth. head of oil pricing at S&amp.P Global Platts.

`With this in mind. it is likely to take some time before any effects become clear. 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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