Oil & Energy

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China crude oil yuan denominated futures began trading at 9 a.m. local time on Monday March 26 on the Shanghai International Energy Exchange. September futures opened at 440 yuan a barrel. The market is open to foreigners, a first in Chinese commodities.

Shanghai Futures Exchange

Shanghai International Energy Exchange is a division of the Shanghai Futures Exchange

Shanghai Futures Specifications

  • Trading hours  9 a.m.-11:30 a.m. and 1:30 p.m.-3 p.m.to reopen at 9 p.m.-2:30 a.m local time.
  • Daily trading band 5 percent price move up or down with 10 percent on its debut day
  • Margin requirements are at 7 percent.
  • Seven grades will be deliverable, featuring Dubai crude, Basrah Light and China’s Shengli.
  • Contracts will have 36 delivery months with the first 12 months as rolling contracts.
  • Daily cost to store crude for delivery into the Shanghai exchange is set at 0.2 yuan a barrel, or at least twice the rate elsewhere. (This is seen  as deterring excessive price swings.

At this point the Shanghai oil futures are being dismissed as not being a challenge to the dominant Brent crude contract in London and West Texas Intermediate contracts in New York.

In a trade war environment and an ever shifting geopolitical game of chess there are different factors to consider before such a place of relevance is dismissed. China clearly wants some control given it is now the world's largest importer of oil and pricing from the main international benchmarks are based in U.S. dollars.

There is also the obvious pricing contro benefits from denominating oil contracts in yuan for domestic use. The other it would promote the use of China’s currency in global trade. That has started somewhat since the Yuan became a memeber of the SDR currency basket but given that one of China’s key long-term goals is denomiatng China trade in yuan there is work to do.

With the Trump Administration imposing tariffs on Chine just three days before members of main stream media are portraying this as a knee jerk reaction in a trade war. In fact Chinese oil futures were proposed in 2012 after oil went as high as $150 a few years before putting China at the mercy of oil prices. China has also matured towards financial markets, China actually introduced domestic crude futures back in 1993, only to end the experiment a year later because of volatility.

Financial futures, or paper volumes far outweigh physical futures contracts and as such move faster and have more impact. In a 24 hour global world it makes sense for China to have say in perhaps it's bigegst inflation risk. Bloomberg reported that "in 2017, oil futures contracts in New York and London outstripped physical trading by a factor of 23. Crude oil is among the most actively traded commodities, with two key benchmarks: West Texas Intermediate, or WTI, which trades on the New York Mercantile Exchange, and Brent crude, which trades on ICE Futures Europe in London. "

Trade responsibly and beware of pitfalls and risks.

From The Traders Community Research Desk

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