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China Moves Closer To Launching Oil Benchmark

Oil futures trading in China is set to finally start later this year after several delays, providing one of the world’s top consumers with a bigger say in Asian oil pricing, not to mention an entry into a trade that’s worth trillions of dollars daily.

The International Energy Exchange, based in Shanghai where the contract will trade, said that it is at the moment working on the finalization of some technical issues, Reuters quoted officials from the bourse as saying. This comes after years of delays. 

More than 6,000 trading accounts have already been opened, almost 75 percent of which are individual trader accounts.  Globally, the oil futures trading market is dominated by institutional investors, Reuters notes. In China, however, individual traders, also called sometimes “pajama traders”, are a force to be reckoned with because of their sheer numbers—to date probably about 100 million. These traders account for 80 percent of the turnover in the Chinese equity market, which is worth about US$8 trillion.

Besides individual traders, however, the big local energy companies and teapot refiners have also opened accounts. PetroChina has opened two and Sinopec has even set up a special trading unit. These two, and other major companies, will provide liquidity for the Chinese oil futures trade, except for local banks, which are barred from trading in futures.

Related: Oil Under Pressure As Saudis Break Key Promise

Some 150 brokerages have also registered for the oil futures contracts, among them the local divisions of UBS and JPMorgan, but INE—the exchange—said that it is hoping to attract other foreign investors as well.

According to Reuters, however, some potential foreign traders have reservations because the Shanghai futures will be priced in yuan. Foreign traders are also concerned with the daily price fluctuation limit, which has been set at 4 percent. There is no mechanism in place to reset price limits after a major international movement, so the Chinese futures contract could, as Reuters says, freeze while prices elsewhere continue moving.

By Irina Slav for Oilprice.com

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