China sets sights on oil benchmark after years of delays

China has opened more than 6,000 trading accounts for its long-awaited crude futures contract – with three-quarters coming from individual traders – as it pushes ahead with plans to compete with global pricing benchmarks.

China’s oil majors and about 150 brokerages have also registered, but the strong interest by ‘mom-and-pop’ investors looks set to mark out China’s crude futures from western counterparts, which are dominated by institutional investors.

Shanghai International Energy Exchange (INE), which will run China’s contract, says it is finalizing technical issues. The contract has faced years of delays and there is still no date set, but INE and also trading participants now say a launch this year is almost certain.

“The INE is striving to launch the crude oil futures within this year,” a spokeswoman said, adding that the exchange has conducted four trials to ensure it is technically ready.

Oil futures trading volume is small during Asian hours despite the region’s role as the world’s top consumer.

Shanghai’s crude futures are aimed at giving China more clout in pricing crude in Asia and a share of the trillions of dollars in oil futures trade.

The INE hopes to attract foreign investors, and locally registered entities of JPMorgan and UBS are among those registered, although international players have raised concerns, including denomination in yuan, that may dampen early take-up.

Most oil trades are priced off two crude derivatives, US West Texas Intermediate (WTI) and London’s Brent, traded on the Intercontinental Exchange and the New York Mercantile Exchange (NYMEX) owned by CME Group.

Earlier attempts to establish an Asian derivative crude contract by Singapore and Tokyo foundered. The only liquid crude futures in the region is the Oman contract on the Dubai Mercantile Exchange.

Retail interest

Successful crude derivatives would be the jewel in the crown in China’s push to ramp up futures trading, on products from dates to steel, to open up markets and offer new avenues for investors.

While Chinese banks are barred from futures trading, the new market is expected to attract interest from deep-pocketed private equity firms and funds, while state-owned oil majors like PetroChina and Sinopec will provide liquidity.

PetroChina is set to register two accounts and Sinopec is setting up a trading outfit in Shanghai dedicated to the contract, said senior company sources.

Independent refiners like Shandong Chambroad Group have also joined, while retail interest is strong.

Individuals already account for 80% of turnover on China’s US$8 trillion equity markets, and day traders have whipsawed commodities from eggs to iron ore in China over the past year.

Jin Changyi, a 40-year-old former hotel owner from eastern China, who began dabbling in Brent crude oil futures last year, has opened a 500,000-yuan (US$75,000) account with a Shanghai-based brokerage and plans to act as a mini-broker for friends.

“The way it’s designed it won’t fluctuate wildly. Compared to trading Brent, the risks are more manageable,” he told Reuters.

International concerns

International interest at first may be more muted.

Executives at international banks and traders who have reviewed the contract rules and specifications warn of concerns including Beijing’s clamp-down on capital outflows, unusually small price limits and China’s heavy-handed intervention in commodity markets last year.

“Everybody is staring at everybody else,” said an official with a western investment bank who declined to be named due to company policy.

Reflecting a regulatory aim to stave off price volatility, the Shanghai contract has a 4% daily price fluctuation limit, half the limit for Chinese coking coal.

China’s crude futures also do not have a mechanism to reset limits after a big price move, which means Shanghai trading could freeze while prices still move elsewhere. For WTI, for example, a US$10 a barrel move activates circuit breakers to pause trade briefly until a new limit of another US$10 is set.

Industry players also worry about delays in issuing rules over storage and grades for deliveries.

The INE has yet to finalise details of warehouse tanks, including locations, rules over fuel blending and price differentials between grades, all key for helping industry participants decide on whether or not to take deliveries.