Chinese Oil Benchmark Denominated in Yuan

Chinese Yuan notes
By Junjiewu99 (Own work) [CC BY-SA 4.0], via Wikimedia Commons

China is increasingly advancing its position in the global energy arena, as one of the largest consumers and producers of oil and other energy commodities. Furthermore several Chinese companies now rank among the largest energy companies in the world, and two companies in particular, CNPC and Sinopec, are major players in the physical markets for crude oil. Given the growing influence of these energy giants in the global market it seemed logical that at some point China would wish to enter and influence open market pricing in the oil sector.

With that in mind, China launched its own oil benchmark in October 2015, similar to Brent and WTI, striving for a more important role in establishing crude prices. Unlike the Western benchmarks, the Chinese contracts will be denominated in the yuan, not the US dollar.

Oil futures were the first Chinese contract to permit direct participation of foreign investors. However, this was not the first step for greater oil market openness in China. In July 2015, Beijing allowed private companies to import crude. Previously importing was only done by state-run majors such as Sinopec, China National Petroleum Corporation and China National Offshore Oil Corporation.

A Shanghai-based contract is now in direct competition in the crude futures market, which is worth of trillions of dollars and is dominated by two contracts, London’s Brent, seen as the global benchmark, and WTI, the key U.S. price.

North Sea, Brent oil was first developed in the 1970s. The ICE Brent futures contract was developed in 1988 and with an approximate output of only 1 million barrels per day, this blend is considered a benchmark and its contracts are now used to set prices for roughly 2/3 of the world’s oil.

One example of the changing face of the oil market is the dominance of China’s state oil companies in Asian crude trading which is a cause of concern for regional oil companies who are considering changing the way billions of dollars worth of crude is priced. This concern came to a head 12 months ago when China’s state oil companies completely controlled trading in the so-called Dubai marker crude, which is the benchmark that determines prices for the 15 million barrels per day of Arabian Gulf crude that is sold to Asia’s refiners.

In further developments, foreign traders interested in crude oil futures contracts listed on the Shanghai International Energy Exchange will not experience any capital limits whereby they will not have any type of quota or size restrictions imposed upon them.

Arguably China is now exerting considerable influence over the price of oil not least in it’s efforts to stockpile oil and their ability to control the supply and demand to suit them in terms of the price paid. It would appear that perhaps they are reaching their stockpile quota again given a few days ago it was reported that China’s crude imports stood at about 7.35 million barrels a day in July, the slowest import trend since January and not related to economic considerations.

Whatever the case, we should watch China closely in the coming months in relation not only to this yuan denominated oil benchmark but also in terms of their influence over the oil demand/supply chain in an ever faltering global economic picture.

2 Comments

  1. additional plans: http://www.zerohedge.com/news/2017-09-02/de-dollarization-accelerates-china-readies-yuan-priced-crude-oil-benchmark-backed-go
    ”The crude oil futures will be the first commodity contract in China open to foreign investment funds, trading houses, and oil firms. The circumvention of U.S. dollar trade could allow oil exporters such as Russia and Iran, for example, to bypass U.S. sanctions by trading in yuan, according to Nikkei Asian Review.

    To make the yuan-denominated contract more attractive, China plans the yuan to be fully convertible in gold on the Shanghai and Hong Kong exchanges.”

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