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Global Energy Advisory March 23rd 2018

Venezuela

China is preparing to challenge the reign of the U.S. dollar as the ultimate petrocurrency by launching much-delayed yuan-denominated oil futures next Monday. The contracts should start trading on the Shanghai International Energy Exchange on Monday, after several years of postponements.

China is being very careful with the futures, seeking to avoid excessive price volatility, which was what led to the end of the short life of Beijing’s first attempt at these contracts back in the 1993. Now, regulators have set strict trading bands of 5% on either side, except the first day of trading when the band will be 10% to allow for the initial excitement to drive more trade in the contracts.

Beijing has also considered discouraging speculators from flocking into the first Asian oil benchmark by setting storage capacity prices significantly higher than the international average. Still, not all analysts and industry observers are convinced the Chinese oil futures will become a success.

The main reason is that foreign investors are wary of trading in China although the country’s commodity markets are certainly attractive with bustling activity that makes ICE, for example, look slow. Yet this activity could also discourage traders who remember the 2008 stock market meltdown in China. Also, all these safeguards against excessive volatility could turn away some genuine traders seeking to tap China’s commodity markets.

The country’s regulators…

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