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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Expert Commentary: What’s Behind China’s Crude Benchmark?

After being in the works for well over half a decade, China is finally launching its own crude futures contract next week, with the ultimate goal of creating a yuan-denominated global crude benchmark. The contract will comprise of seven grades that can be accepted for delivery: Dubai Fateh, Upper Zakum, Oman Export, Masila, Qatar Marine, Shengli and Basrah Light.

The most focus will be on Basrah Light, given it is the most abundant of the grades that is accepted for delivery under the contract terms (Oman Export volume is mostly committed under term contracts). According to our sources, we believe that a significant proportion of contracts will be held for physical delivery. (We've published a report on the subject, you can access it here).

Of the seven grades accepted for delivery, only five of them were discharged in China last year - there was a complete absence of Shengli and Dubai Fateh. Deliveries of these five grades averaged over 1.3 million barrels per day, with Basrah Light leading the way at 620,000 bpd:

(Click to enlarge)

We at the good ship Clipper have launched an absolute rockin' AIS cargo map, which shows vessels by commodity type, cargo and grade, as well as providing a bunch of filtering tools including forward projections for the ultimate destinations.

The image below shows vessels on the water that were loaded with crude at Basrah (red ones are VLCCs, blue ones are Suezmaxes - hence the trend of blues mostly heading through the Suez Canal).

India, China and the U.S. are the leading recipients of this crude, accounting for over 60 percent of deliveries last year. It is therefore no surprise to see barrels of Basrah Light and Basrah Heavy predominantly running these routes. (Hark, a steady stream of VLCCs going round the Cape of Good Hope, destined for the U.S. Gulf).

(Click to enlarge) 

In contrast, Oman Export crude flows are much more polarized. As our ClipperData illustrate below, over 70 percent of Omani crude flows typically head to China (although they've had a bit of a slow start to 2018 in Jan/Feb). Related: Will China’s New Oil Futures Flop?

(Click to enlarge)

This polarization is exemplified by the movement of VLCCs carrying Omani crude below. (Hark, a couple of piracy incidents as well in West Africa).

(Click to enlarge)

Going back to the Chinese futures contract, next week is going to be a watershed moment for China. While it is impossible to forecast the future success of the contract, the fact that it has been in the works for so many years only highlights China's desire to 'Git 'Er Done'. Given this underlying ambition, we should not be dismissive of it growing in prominence to be a leading benchmark over the coming decade.

By Matt Smith

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  • jack ma on March 23 2018 said:
    Type of oil is secondary to the real purpose for the contract and oil types can be adjusted. China knows the dollar is failing so here the transactions are in the Yuan and fully exchangeable for physical gold. This is the death-spike that kills the petrodollar once and for all over the next 5 years. The USA would have bombed China to stop this contract on the 26th but China would shoot back ===> unlike a middle east nation that can be pillaged by the maw of the beast with no consequences. America has died, but it just does not know it yet. IMHO

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