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China's Oil Futures Launch With A Bang

China’s yuan-denominated crude oil futures launched today in Shanghai with 15.4 million barrels of crude for delivery in September changing hands over two and a half hours—the length of the first-day trading session for the contract.

Glencore, Trafigura, and Freepoint Commodities were among the first to buy the new contract, Reuters reports. Within minutes of the launch, the price had gone up to almost US$70.85 (447 yuan) from a starting price of US$69.94 (440.4 yuan) per barrel. The overall price jump for the short trading session came in at 3.92 percent.

Many awaited the launch eagerly, seeking to tap China’s bustling commodity markets, although doubts remain whether the Shanghai futures contract will be able to become another international oil benchmark. These doubts center on the fact that China is not a market economy, and the government is quick to interfere in the workings of the local commodity markets on any suspicion of a bubble coming.

To prevent such a bubble in oil, the authorities made sure the contract will trade within a set band of 5 percent on either side, with 10 percent on either side for the first trading day. Margin has been set at 7 percent. Storage costs for the crude are higher than the international average in hopes of discouraging speculators. Related: Big Oil’s Trillion Dollar Data Battle

As a result of these tight reins on the new market segment, some analysts believe international investors would be discouraged to tap the Shanghai oil futures. If the first day of trading is any indication, however, this is not the case, at least not for large commodity trading firms.

On the other hand, China is not leaving everything to market forces. One energy consultant told Reuters that “The government (in Beijing) seems determined to support it, and I hear a number of firms are being asked or pressured to trade on it, which could help.”

PetroChina and Sinopec are seen as instrumental in providing long-term liquidity for the new market as well.

By Irina Slav for Oilprice.com

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  • Mamdouh G Salameh on March 26 2018 said:
    I have no doubt whatsoever that China’s petro-yuan-denominated crude oil futures contract which was launched today will prove an outstanding success. After all, China is the world’s largest importer of crude oil, the world’s largest exporter and also the biggest economy on the globe based on purchasing power parity (PPP). Moreover, the government in Beijing has attached so much prestige to it to let it fail.

    This will mark the most momentous turning point for the US economy and the petrodollar and also for China’s status as an economic superpower.

    Since the early 1970s, the global oil trade has almost entirely been conducted in petrodollars. Moving oil trade out of the petrodollar into the petro-yuan will take initially between $600 billion and $800 billion worth of transactions out of the petrodollar. Maintaining the petrodollar is America’s primary goal. Everything else is secondary.

    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.

    The petrodollar is backed by Treasuries, so it can help fuel US deficit spending. Take that away, and the US economy will be in trouble leading to a strong and steady decline in the dollar’s value.

    But it won’t be easy to unseat the petrodollar without the participation of some major oil producers like Russia and Saudi Arabia. Russia is already on board along with Iran and Venezuela.

    China is now trying to persuade Saudi Arabia to start accepting the yuan for its crude oil. If the Chinese succeed, other oil exporters could follow suit. For Saudi Arabia, it will find itself between a rock and a hard place – lose the Chinese oil market or spark the ire of Washington.

    The launching of the crude oil benchmark on the Shanghai exchange could mark the beginning of the end of the petrodollar. The United States is not going to take this potential threat lying down.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Brian on March 26 2018 said:
    US Govt on the other hand is not innocent to manipulating markets when crashing. Bubbles no problem. Of course it's going up.
  • Crude Trader on March 26 2018 said:
    I am thankful that I just had to divide the volume number by 1000 to make sense, and not by 42,000. Thank you.
  • CorvetteKid on March 27 2018 said:
    Mamdouh, China is a closed economy with a non-convertible currency, minimal bond markets, and lack of liquidity. Rule of law is non-existent and the Communist Party rules the country.

    Until those change, the dollar reigns supreme and so do petrodollars.

    Nobody is parking $20 billion overnight or over a weekend in the Chinese money markets.
  • Diana on March 31 2018 said:
    Nah China has done this before in the 1990's. They abandoned it saying its too volatile. Look idiots if china could kill petrodollar with this simple futures investment vehicle they would have kept this going in the 1990s. Its very simplistic. If they failed then who's to say they won't now?

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