Brent and West Texas Intermediate (WTI), which are grades of crude oil used as benchmark in oil pricing, will get a competition soon in the form of the newly established yuan-denominated oil futures, the Shanghai Futures Exchange.
The newly minted financial oil instrument was launched in China yesterday and saw big merchants Trafigura, Freepoint Commodities and Mercuria trading in new contracts but analysts say the enthusiasm may be due to the arbitrage opportunities it creates.
“It is really just a way for China to have more say in a market that it is a major participant, in my view,” Rafiq Raji, chief economist at Macroafricaintel tells BusinessDay.
“But traders seem excited about the potential arbitrage opportunities that the new Shanghai crude contracts would likely provide relative to WTI and Brent,” Raji said.
Reuters report that though concerns remain that smaller overseas investors may struggle with unfamiliar rules and complex regulation, China’s first commodity derivative, open to foreign investors – marked the culmination of a decade-long push by the Shanghai Futures Exchange (ShFE) to give the world’s largest energy consumer more power in pricing crude sold to Asia.
China is the world’s second-largest oil consumer and in 2017 overtook the United States as the biggest importer of crude oil. Its demand is already a key determinant of global oil prices.
With major overseas traders displaying a strong appetite to punt in China’s vast derivatives market, Shanghai’s turnover challenged Brent volumes during Asian hours, reflecting the potential for arbitrage trade with oil markets in the United States, Europe and Oman.
“Whether this will have any real bearing on the other crude benchmarks, I’m not quite sure, but traders love a new toy, so I applaud China for bringing in something that could stoke up some volatility,” said Matt Stanley, a fuel broker with Freight Investor Services (FIS) in Dubai.
First-day enthusiasm saw 20 million barrels of September oil changing hands in Shanghai by the 3:00 p.m. (0700 GMT) close, but it’s not clear the pace will hold in the night session, which runs from 9:00 pm to 2:30 am, or on into coming days.
The 15.4 million barrels done in Shanghai’s 2-1/2-hour morning session initially topped the Brent May crude contract, before Europe’s benchmark came alive around 0500 GMT
“We’ve seen already this morning it appears to be a liquid contract from the off,” said David Martin, JPMorgan Chase & Co’s Asia Pacific head of global clearing, at an event for the launch in Shanghai.
