• 4 minutes Pompeo: Aramco Attacks Are An "Act Of War" By Iran
  • 7 minutes Who Really Benefits From The "Iran Attacked Saudi Arabia" Narrative?
  • 11 minutes Trump Will Win In 2020
  • 15 minutes Experts review Saudi damage photos. Say Said is need to do a lot of explaining.
  • 1 min Ethanol is the SAVIOR of the Oil Industry, Convenience Store Industry, Automotive Supply Chain Industry and Much More!
  • 4 hours Let's shut down dissent like The Conversation in Australia
  • 12 hours One of the fire satellite pictures showed what look like the fire hit outside the main oil complex. Like it hit storage or pipeline facility. Not big deal.
  • 10 hours Saudi State-of-Art Defense System looking the wrong way. MBS must fire Defense Minister. Oh, MBS is Defense Minister. Forget about it.
  • 19 hours Donald Trump Proposes Harnessing Liberal Tears To Provide Clean Energy
  • 11 hours Trump Accidentally Discusses Technology Used In The Border Wall
  • 18 hours Saudis Buying Oil From Iraq
  • 8 hours Ethanol, the Perfect Home Remedy for A Saudi Oil Fever
  • 9 hours Hong Kong protesters appeal to Trump for support.
  • 1 day Drone attacks cause fire at two Saudi Aramco facilities, blaze now under control
  • 3 hours Collateral Damage: Saudi Disruption Leaves Canada's Biggest Refinery Vulnerable
  • 19 hours Saudis Confirm a Cruise Missile from Iranian Origin
  • 3 hours Iran in the world market
Alt Text

Trump Battles To Avoid War With Iran

The investigation into who launched…

Alt Text

The Biggest Week In 50 Years For Oil

Oil markets saw the biggest…

Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

More Info

Premium Content

Will China’s New Oil Futures Flop?

This week will see a historic event: on March 26, trading will begin in yuan-denominated crude oil futures contracts on the Shanghai International Energy Exchange. The futures launch is historic because it will be the first time that foreign traders will have access to a Chinese commodity market. It is also historic because the yuan oil futures have been in the making for years, but have been delayed time and again.

Many investors are eagerly awaiting the chance to tap China’s booming commodity markets, but Beijing is going about the launch with extra caution after in 1993 its first attempt at oil futures flopped within a year because of uncontrollable price volatility.

China last year became the world’s top oil importer, and this year it will likely keep the crown. The time is as ripe as it will ever be for the launch of the futures, and China is now trying to make sure that volatility will not be excessive. This, however, could compromise the success of the futures.

The approach Beijing has chosen is through increasing the cost of oil storage to discourage pure-play speculators from flooding in the market and unleashing price volatility that could spell doom for the brand-new contracts. Bloomberg reports that these will be set at about US$0.95 per barrel per month. This compares with US$0.05-0.07 per barrel per month for storage capacity at Louisiana’s Offshore Oil Port. The international storage cost averages US$0.25-0.50 per barrel per month.

Such high storage costs will almost certainly discourage speculators such as prop traders and hedge funds from tapping the new yuan-denominated contract, all the more so in light of the fact that the nearest-term contract to be launch on March 26 is for delivery in September. Related: Oil Prices Tear Higher On Middle East Tensions

Yet these high costs, which could exceed US$1 per barrel per month when you add financing costs, could discourage even legitimate investors. “High storage costs could prevent the necessary arbitrage between cash and futures markets, which further significantly reduces the price discovery function of the contract. “Without a good price discovery function, no futures contracts can eventually be successful,” Jian Yang from the University of Colorado Denver J.P. Morgan Center for Commodities Research Director told Bloomberg.

It is obviously a question of priorities. China wants these futures because of the vibrant oil trade going on in the world’s largest importer of the commodity. What it doesn’t want is excessive volatility, which has become the mark of Chinese commodity markets in recent years as trading becomes a national sport for the Chinese.

Already a trading band of 5 percent on either side has been set for the oil futures, with 10 percent on either side for the first trading day. Margin has been set at 7 percent. There is no doubt that regulators are ready to step in without delay should the new market start to exhibit any signs of a bubble. All seems set for the launch.

It looks like the authorities have done what they can to cap the volatility potential, but only time will tell if the bigger goal could be achieved: displacing the dollar as the one and only petrocurrency in the world, part of Beijing’s strategy of advancing the country’s global influence by making the yuan an international currency.

By Irina Slav for Oilprice.com

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage



Leave a comment
  • Jonathan Pulliam on March 21 2018 said:
    China is a slow learner.
    They make same regulatory blunders over and over.
    This exercise is a good crucible to price-"discover" if the Chinese will over-pay for crude oil.
    My guess is they will.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play