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Crude futures to open door to foreigners
By Richard Fu |
January 14, 2013, Monday
|
Print Edition
Print Edition
CHINA is expected to initiate crude futures trading this year, giving the nation a bigger voice in global oil pricing and offering foreign investors direct access to Chinese commodities markets for the first time.
Planning for crude oil futures trading has been underway for years in China.
Last April, Guo Shuqing, chairman of the China Securities Regulatory Commission, said the contracts would be introduced in 2012. Although the reform-minded regulator failed to deliver on that promise, fresh actions from the Shanghai Futures Exchange signaled the start of trading is not far away.
On Tuesday, the exchange held an internal test and training session on its so-called "international platform," covering issues from account opening to the settlement and clearing in foreign exchange. This fanned speculation that the crude contract is one step closer because it's the first futures contract designed to be open to foreign investors.
Exchange Chairman Yang Maijun had said in November that research on risk control and work on technology issues for the contract had been completed and simulated trading would begin as soon as possible.
Last month, China Energy News reported that the exchange is technically ready to launch the world's first futures contract in petroleum bitumen, which is used in road construction. It cited Lu Feng, a senior director of the bourse's energy and chemical department.
The bitumen contract is considered by many to be a prelude to the launch of the much-awaited crude futures.
Regulators want Shanghai crude futures to become an Asian benchmark for a world market now dominated by Brent crude in Europe and West Texas Intermediate futures in the US. China is world's second-largest consumer of oil and oil products.
Details of the contract are still unknown, but market watchers said it could be based on crude prices at Chinese ports, or on prices that include cost, insurance and freight. The contract is likely to cover a type of medium sour grade crude, according to consultancy ICIS C1 Energy. Deliveries would take place in bonded storage facilities along the east coast.
The China Securities Journal reported the exchange is preparing both yuan settlement and dollar settlement for the new contract.
State-owned oil giants like Sinopec Corp and PetroChina Co, which handle the vast majority of China's crude imports, use Brent and WTI benchmarks to price imports and hedge risks. They welcome the introduction of Chinese futures, industry officials said.
Limited impact
But analysts said it would be difficult for these oil firms to move into the new untested contract, at least in the initial stages. They also said that the proposed crude contracts may have a limited impact on pricing because China is a big consumer but not a big producer of oil.
"It might increase the volumes but not necessarily on the price level," said Walter de Wet, the head of commodity research at Standard Bank.
The Shanghai exchange is not the only one vying to become an Asian benchmark. The Dubai Mercantile Exchange launched an Oman oil futures contract in 2007.
In the past year, according to media reports, Shanghai Futures Exchange officials have visited London, New York, Singapore and most recently Riyadh to promote the pending China crude futures. The Times in Britain said the delegation urged officials in Saudi Arabia, the world's largest oil producer, to switch to the Shanghai benchmark to price its crude.
That doesn't seem likely at this stage. The Dubai bourse hasn't been able to persuade Saudi and other producers to adopt its Oman contract as a pricing benchmark. But in the long run, Shanghai could be more persuasive because China is Saudi Arabia's biggest customer and is poised to become even bigger now that the shale gas boom in the US has reduced that nation's dependence on imported oil.
"It was purposes of market survey," said an exchange official of the Saudi trip. He went on to note that the exchange wants the contract to be an Asian benchmark, so officials need a better understanding of demand in Asia and type of crudes that best represent the region.
While liquidity is the key to a successful launch of Shanghai crude contracts, foreign participation is also essential if China wants its crude futures to gain global prominence.
In its five-year development plan released last month, the Shanghai exchange confirmed that foreigners will be allowed to trade the new crude contracts once launched. It's all part of the bourse's plans to become a leading Asia-Pacific futures market.
Crude futures trading may open the door for wider foreign participation in China's commodity markets, analysts said. At present, the futures markets are largely off-limits to foreigners amid official concerns about rampant speculation and inflation.
The Shanghai bourse offers several base metals contracts, such as copper, whose prices are already regarded as a regional benchmark amid good liquidity. But restrictions on trading have limited their appeal as global benchmarks.
The pending crude contract may also prompt China to hasten reforms in the tightly controlled oil imports sector, but most analysts said they don't expect deregulation to occur quickly.
Only a small number of mainly state-owned oil companies, including Sinopec and PetroChina, are allowed to import crude into China. A relaxation of controls might attract more foreign participation in the sector, analysts said.
Planning for crude oil futures trading has been underway for years in China.
Last April, Guo Shuqing, chairman of the China Securities Regulatory Commission, said the contracts would be introduced in 2012. Although the reform-minded regulator failed to deliver on that promise, fresh actions from the Shanghai Futures Exchange signaled the start of trading is not far away.
On Tuesday, the exchange held an internal test and training session on its so-called "international platform," covering issues from account opening to the settlement and clearing in foreign exchange. This fanned speculation that the crude contract is one step closer because it's the first futures contract designed to be open to foreign investors.
Exchange Chairman Yang Maijun had said in November that research on risk control and work on technology issues for the contract had been completed and simulated trading would begin as soon as possible.
Last month, China Energy News reported that the exchange is technically ready to launch the world's first futures contract in petroleum bitumen, which is used in road construction. It cited Lu Feng, a senior director of the bourse's energy and chemical department.
The bitumen contract is considered by many to be a prelude to the launch of the much-awaited crude futures.
Regulators want Shanghai crude futures to become an Asian benchmark for a world market now dominated by Brent crude in Europe and West Texas Intermediate futures in the US. China is world's second-largest consumer of oil and oil products.
Details of the contract are still unknown, but market watchers said it could be based on crude prices at Chinese ports, or on prices that include cost, insurance and freight. The contract is likely to cover a type of medium sour grade crude, according to consultancy ICIS C1 Energy. Deliveries would take place in bonded storage facilities along the east coast.
The China Securities Journal reported the exchange is preparing both yuan settlement and dollar settlement for the new contract.
State-owned oil giants like Sinopec Corp and PetroChina Co, which handle the vast majority of China's crude imports, use Brent and WTI benchmarks to price imports and hedge risks. They welcome the introduction of Chinese futures, industry officials said.
Limited impact
But analysts said it would be difficult for these oil firms to move into the new untested contract, at least in the initial stages. They also said that the proposed crude contracts may have a limited impact on pricing because China is a big consumer but not a big producer of oil.
"It might increase the volumes but not necessarily on the price level," said Walter de Wet, the head of commodity research at Standard Bank.
The Shanghai exchange is not the only one vying to become an Asian benchmark. The Dubai Mercantile Exchange launched an Oman oil futures contract in 2007.
In the past year, according to media reports, Shanghai Futures Exchange officials have visited London, New York, Singapore and most recently Riyadh to promote the pending China crude futures. The Times in Britain said the delegation urged officials in Saudi Arabia, the world's largest oil producer, to switch to the Shanghai benchmark to price its crude.
That doesn't seem likely at this stage. The Dubai bourse hasn't been able to persuade Saudi and other producers to adopt its Oman contract as a pricing benchmark. But in the long run, Shanghai could be more persuasive because China is Saudi Arabia's biggest customer and is poised to become even bigger now that the shale gas boom in the US has reduced that nation's dependence on imported oil.
"It was purposes of market survey," said an exchange official of the Saudi trip. He went on to note that the exchange wants the contract to be an Asian benchmark, so officials need a better understanding of demand in Asia and type of crudes that best represent the region.
While liquidity is the key to a successful launch of Shanghai crude contracts, foreign participation is also essential if China wants its crude futures to gain global prominence.
In its five-year development plan released last month, the Shanghai exchange confirmed that foreigners will be allowed to trade the new crude contracts once launched. It's all part of the bourse's plans to become a leading Asia-Pacific futures market.
Crude futures trading may open the door for wider foreign participation in China's commodity markets, analysts said. At present, the futures markets are largely off-limits to foreigners amid official concerns about rampant speculation and inflation.
The Shanghai bourse offers several base metals contracts, such as copper, whose prices are already regarded as a regional benchmark amid good liquidity. But restrictions on trading have limited their appeal as global benchmarks.
The pending crude contract may also prompt China to hasten reforms in the tightly controlled oil imports sector, but most analysts said they don't expect deregulation to occur quickly.
Only a small number of mainly state-owned oil companies, including Sinopec and PetroChina, are allowed to import crude into China. A relaxation of controls might attract more foreign participation in the sector, analysts said.
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