Will Shanghai International Energy Exchange save oil?

Will Shanghai International Energy Exchange save oil?

China’s yuan-denominated crude-oil futures surged on their long-awaited debut on the Shanghai International Energy Exchange today, indicating positive initial sentiment toward the new market, which Beijing hopes will eventually give the country an oil benchmark to rival those in the US and Europe.

Futures for September settlement, the most active contract, opened at 440 yuan a barrel, up from a reference price of 416 yuan. About 20,300 contracts changed hands over the course of the day, which excluded an additional 5 1/2 hours of overnight trading.

At one point, volume eclipsed trading in front-month Brent futures, which is typically lightest during the Asian day. But by 5 p.m. Shanghai time, 37,655 of those Brent contracts had changed hands. The daily average is about 285,000 for March. September Brent and WTI traded near $68.22 a barrel and $63.94, respectively, on Monday.

Commodity giants Glencore Plc and Trafigura Group were among foreign participants as the yuan-denominated futures started on the Shanghai International Energy Exchange today. After an initial surge in volume that outpaced overnight transactions in global benchmark Brent crude in London, trading tapered off toward the end of the session and the contract closed at 429.9 yuan a barrel ($68.22).

Glencore and Trafigura joined trading via overseas brokers, according to the Shanghai International Energy Exchange, which is known as INE. Other participants included Freepoint Commodities, BOCI Global Commodities and North Petroleum International. Among domestic companies, firms including Unipec, Chinaoil, Cnooc Ltd. and Sinochem took part. Independent refiner Shandong Huifeng Petrochemical did too, Bloomberg reported.

To attract more foreign participation, China will waive income taxes for overseas individuals and institutions. About 19 foreign brokers had registered to trade the contracts as of last week, the exchange said. While the country hopes to establish a benchmark for global oil transactions, whether the Asian nation will achieve that goal has been the subject of hot debate.

A senior analyst of 'Uralsib Capital', Alexei Kokin, speaking to Vestnik Kavkaza, noted that in the first place the Shanghai International Energy Exchange will engage in Chinese domestic issues. "I believe that the main function of this contract in the near future is to offer Chinese  investors access to global commodity markets. As for international investors, I think the contract may be of interest to them as an arbitrage opportunity, but it is unlikely to be convenient for hedging risks of oil suppliers," he warned.

"Typically, contracts that are convenient for hedging are tied to a place of storage that is close enough to the producing region. For example, Brent oil is the North Sea, WTI is Cushing. So I don't expect that the contract will lead to any special changes in the world oil market," Alexei Kokin stressed.

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