The launch of China’s first oil futures contract has been put back by up to a year after a burst of speculative trading activity in commodities alarmed regulators and foreign traders raised concerns about its complexity.
The China Securities Regulatory Commission is unlikely to give approval for the new futures contract — to be listed on Shanghai’s International Energy Exchange — until next year after it had to step in and urge domestic exchanges to curb speculative trading in April, according to industry sources.
China hopes the launch of a renminbi-denominated futures contract aimed at international investors will help create a benchmark for oil prices in China that could eventually rival IntercontinentalExchange’s London-traded Brent crude oil contract — the global benchmark — or CME Group’s US marker, West Texas Intermediate.
It could also help China, the world’s biggest importer of crude, shift the pricing of oil away from the US dollar, a move that China has already encouraged with some of its trading partners. Last year Gazprom Neft, the oil arm of state gas group Gazprom, said it had been selling in renminbi all of its oil for export down the East Siberia Pacific Ocean pipeline to China.
But the Shanghai International Energy Exchange, which was set up in November 2013 under the Shanghai Futures Exchange, has encountered multiple delays to its launch schedule. In May 2015 the chairman of SHFE Song Anping said the oil futures contract would start trading at the end of that year.
But the CSRC has since had to deal with a stock market collapse in June of last year and a burst of speculative trading in commodities during March and April that saw the country’s steel rebar futures become the third-most traded commodity futures contract in the world. In February the former head of the CSRC, Xiao Gang, was removed from his post.
The CSRC issued a statement in April saying it would not allow futures markets to become a “hotbed for short-term speculators”.
In a response to a question from the Financial Times, the exchange said it is “ preparing for the launch of the crude oil futures contract and is pushing forward the construction of China’s crude oil futures market.” It declined to comment on the timing.
It added that it had received more than 400 comments and suggestions on contract design, trading, delivery, settlement and risk management from domestic and overseas market participants.
It’s certainly more complicated than the market wants in order to have confidence
“Taking into consideration the recent price fluctuation of the global commodities markets, INE is studying and analysing these comments and suggestions, to optimise and perfect the rules, aiming to improve the ability to manage and handle market risks, with the bottom-line to prevent systematic risks,” it said.
Foreign investors have questioned the complexity of the oil futures contract and its proposal to be based on multiple deliverable Middle Eastern crude grades such as Iraq’s Basra Light.
“It’s certainly more complicated than the market wants in order to have confidence,” said Dave Ernsberger, global director of oil at S&P Global Platts, the price assessment group. “They are better off to my mind picking a crude and going with it. I think they might take a step back and look at the whole design again.”
Chinese state-owned traders such as Unipec and Chinaoil have emerged as some of the largest traders of Middle Eastern oil benchmarks. Chinaoil took 81 per cent of the oil through the spot market this year through the Platts Middle Eastern benchmarks, ahead of Shell and Vitol, according to Platts.
In contrast, six years ago the top traders on the spot market were western traders such as Shell and Phibro, which was later sold to Occidental.
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