This year’s crude oil futures trading activity is on track for a record high, as trading volumes in China’s new yuan-denominated futures contract is offsetting lower activity in the world’s top benchmarks and most active contracts, Brent and WTI, Reuters reports, citing data from exchanges.
The Chinese oil futures, launched in March this year on the Shanghai
International Energy Exchange (INE), are still seen mainly as a Chinese market for Chinese traders who don’t trade on market fundamentals. The futures contract struggles to become truly international for market participants, while inconsistent trading volumes are not helping international traders to use the Shanghai futures as a financial hedge.
Analysts have also flagged storage costs in China as one of the problems that traders could face in the delivery mechanism of the Chinese oil futures contract. Storage costs in China are much higher than elsewhere. The reason for the higher cost is limited storage capacity availability and the requirement that the cargo be stored at a specific storage facility rather than at any available.
Nevertheless, in its first year of launch, the Chinese crude oil futures contract has already taken a 6-percent market share from the most active contracts, WTI and Brent.
According to data from exchanges quoted by Reuters, the trading volumes of Brent and WTI dropped to 207.2 million lots of 1,000 barrels each this year through December 10, compared to 220.17 million lots traded last year. Trading volumes in WTI and Brent are set to decline in 2018 for the first time since 2013.
But the Shanghai crude oil futures volume trade of 13 million lots until December 10, added to the WTI and Brent trading volumes, will push the oil futures trading globally to a record high this year.
“If a new exchange achieves 6 percent market share vs the two incumbents within the first year of trading that’s fairly impressive,” John Driscoll, director of Singapore-based consultancy JTD Energy, told Reuters.
To compare, the year in which the Brent futures contract started trading in 1988, Brent took a 3.1-percent share from then-dominant WTI contract.
By Tsvetana Paraskova for Oilprice.com
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Almost nine months since its launch, the Chinese crude oil futures contract (the petro-yuan) has already taken a 6% market share from the most active contracts, WTI and Brent and has already helped expand crude oil futures trading activity this year by offsetting lower activity in the the world's most active contracts, Brent and WTI.
This achievement by the Chinese crude oil futures is the more impressive given the fact that when Brent futures contract started trading in 1988, it only took a 3.1% share from the then-dominant WTI contract.
The petro-yuan is aided by the fact that China is the world’s largest economy based on purchasing power parity (PPP) and also the largest importer of crude oil in the world. It can bank on the combined oil exports of Russia, Iran and Venezuela and also on China’s oil imports amounting in total to 22 million barrels a day (mbd) or 32% of all globally traded oil. Saudi Arabia will soon have to accept the petro-yuan for payment for its exports to China out of expediency to be followed by a few Arab Gulf oil producers. How long will it take the petro-yuan to overtake the petrodollar as the oil currency?
The petrodollar system provides at least three immediate benefits to the United States. It increases global demand for US dollars. It also increases global demand for US debt securities and it gives the United States the ability to buy oil with a currency it can print at will. In geopolitical terms, the petrodollar lends vast economic and political power to the United States. China would like to replicate this dynamic.
With major oil exporters finally having a viable way to circumvent the petrodollar system, the US economy could soon encounter severely troubled waters. First of all, the dollar’s value depends massively on its use as an oil trade medium. When that is diminished, we will likely see a strong and steady decline in the dollar’s value.
The European Union (EU) will be using the euro for payment for Iranian crude imports and is also considering the launch of its own euro-denominated crude oil contracts. Such a move along with the petro-yuan could undermine the supremacy that the petrodollar has enjoyed since 1973.
It is probable that the Chinese yuan will emerge as the world’s top reserve currency within the next decade with the petro-yuan dominating global oil trade.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
The other significant feature of the Shanghai oil futures contract is that it builds on the prior launch by Beijing of a yuan-denominated gold futures market in Hong Kong in July 2017. This ensures that oil traders can, if they wish, exchange their yuan as secured on the oil markets for gold. It is also relevant that China has been an assiduous collector of the world’s gold over the past several years. Thus the gold convertibility of the yuan-based oil futures contract is ensured.