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Oil Markets Face Nightmare Scenario

Oil Markets Face Nightmare Scenario

Financial markets saw their worst…

China’s New Oil Futures Face Volatility Fears

Trading Screen

It has been a hectic three days for the newly launched Chinese crude oil futures on the Shanghai Exchange, with the contract plunging heavily yesterday after a mass selloff.

The contract started trading on Monday, adding 6 percent in just the first session that lasted two and a half hours. Since then, however, the price has been moving up and down, with the “down” especially pronounced on Wednesday as traders kept their eyes and ears open for developments on the wider international market.

Meanwhile, Goldman Sachs analysts warned that “Elevated transactions fees, margin requirements and position limits may ultimately dampen the size and price impact of INE speculative flows, with the exchange already publicly stating its desire to limit volatility and large price moves.”

The Shanghai contract’s price relative to Brent and WTI was what analysts paid special attention to, expecting freight costs for delivery of the crude to China to serve as a tailwind, while the generally lower quality of the crude included in the contract to apply counterpressure.

Indeed, on Wednesday, the Shanghai contract had dropped below Brent but above WTI. According to Bloomberg, this signals that market players are still waiting for the contract to find its real value.

Another note Bloomberg makes is that trade in the new futures has so far concentrated on the front-month contract, which leaves less liquidity for deliveries further down the road, effectively stopping oil industry participants from taking advantage of the futures contracts to hedge against price fluctuations—one of the principal purposes of futures contracts by definition.

Related: The End Of The Status Quo In LNG Markets

One other outtake from the first three days of trade is that open interest in the yuan-priced futures is much smaller than that on Dubai oil futures. This, according to a senior analyst from J. P. Morgan, indicates overactive speculative trading in the contract, which is exactly what Beijing does not want for its future oil benchmark. Still, it is early days, so it would be reasonable to wait a while longer before drawing any definite conclusions about the yuan futures’ fate.

By Irina Slav for Oilprice.com

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