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China plans first oil futures contract
From the Financial Times of Mon, 15 Dec 2014 14:32:59 GMT
WILLISTON, ND - JULY 28: Scott Berreth, a derrick hand for Raven Drilling, works on an oil rig drilling into the Bakken shale formation on July 28, 2013 outside Watford City, North Dakota. North Dakota has been experiencing an oil boom in recent years, due in part to new drilling techniques including hydraulic fracturing and horizontal drilling. In April 2013, The United States Geological Survey released a new study estimating the Bakken formation and surrounding oil fields could yield up to 7.4 billion barrels of oil, doubling their estimate of 2008, which was stated at 3.65 billion barrels of oil. Workers for Raven Drilling work twelve hour days fourteen days straight, staying at a camp nearby, followed by fourteen days. (Photo by Andrew Burton/Getty Images)©Getty

China has approved a new oil futures contract, with the world’s largest importer of oil saying it hopes to attract foreign investors and brokers in a bid to gain greater pricing power.

The oil futures will be the country’s first international futures contracts and a global trade and settlement platform will be built, the China Securities Regulatory Commission said on its website. The announcement did not give a launch date for the contract.

“The listed crude oil futures is an important effort to open China’s futures markets to the outside world,” the statement said.

China’s futures markets are playing an increasingly important role in influencing prices for the world’s commodities, especially in metals, where China is the largest consumer. Increasingly the volumes traded on the Shanghai Futures Exchange are equal to the London Metal Exchange and the Comex in the US put together, according to Macquarie.

The oil contract will be operated by the Shanghai International Energy Exchange Corporation, which opened up in the Shanghai free-trade zone in November 2013. It is likely to be physically deliverable in China and based on Oman crude, the benchmark for the Dubai Mercantile Exchange, according to a person familiar with the matter.

“We will see the development of a new pool of trading liquidity away from London and New York — this is very important to China given that it imports more than half its oil needs from the Gulf,” William Barkshire, managing director of Agora Partners in Hong Kong, said.

Current WTI oil futures are based on oil deliverable to Cushing, Oklahoma. The ICE Brent contract is cash-settled.

A lot could depend on how quickly China eases controls over oil imports. The vast majority of China’s crude oil is imported by PetroChina, Sinopec and smaller oil major Cnooc, as well as two state-owned trading companies.

In a small first step in August China issued a crude import licence to a non-state-owned company.

The oil contract is unlikely to be as influential as China’s metals futures contracts because the global oil futures markets are already very large and liquid, Colin Hamilton, an analyst at Macquarie said. But it will be monitored as a gauge of sentiment, since Asia is where most of the expected growth in oil demand is due to come from, he said.

China’s commodities futures exchanges in Dalian, Shanghai and Zhengzhou rank among the largest in the world.

The country’s commodity futures exchanges traded 1.868bn contracts in 2013, an increase of 39 per cent over the previous year, according to the Futures Industry Association.

Volumes in precious metals contracts such as gold and silver, have soared. The number of gold futures contracts traded rose more than threefold to 20.1m in 2013 as night trading was introduced, allowing Chinese investors to trade in US and European hours.

This month, China’s Dalian Commodity Exchange also said it will allow night trading in iron ore, coking coal and soyabean futures.

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