Petroyuan Offensive: China’s Oil Futures Market Opens Up to Global Investors

Crude Oil Storage
Petroyuan Offensive: China’s Oil Futures Market Opens Up to Global Investors

The Shanghai International Energy Exchange (INE) is scheduled to begin trading crude-oil futures contract on March 26, following years of development.

The INE, a child of the Shanghai Futures Exchange, is launching its long-awaited crude-oil futures contract in the end of March. As the exchange is registered in Shanghai’s free trade zone, foreign investors together with Chinese buyers will have an opportunity to lock in oil prices and pay in local currency. This is the first time that international buyers are allowed in China’s commodities markets.

Banks, whose market-making role would be crucial to the success of the contract, along with physical and financial crude-oil traders, are keen to trade on the INE. However, there are ongoing debates as to how much of an impact the contract could have on the global oil trade.

China is foraying into Petrodollar territory here. There are possible implications for the U.S. dollar as a well-established global currency of the oil market.

The yuan-backed oil trade will help boost the position of the renminbi as a global currency, but all that will depend on how the market and investors choose to go. The more foreign participants choose to trade on the INE, the stronger boost the yuan will get.

There is also a question of the growing demand in the region. The Asia-Pacific region has surpassed America and Europe in crude consumption. China alone is the world’s second largest oil consumer after the United States.

Demand is likely to soar in the future as the country is thirsty for energy to fuel its economic growth. However, the crude price benchmark with high recognition in the Asia-Pacific region is still missing.

Analysts say the INE futures contract will be able to compete for the oil price benchmark in the Asia-Pacific, hopefully becoming part of the 24-hour global trading system, together with Brent and WTI futures.

Gu Jingtao, an analyst with Chinese investment bank BOCI, says there is sufficient demand for the crude futures contracts from both industrial and financial clients as they need a tool to manage risk, and hedge against inflation.

Individual investors can also benefit from the launch as their interests are better protected in exchanges rather than through over-the-counter trading. However, although the interest is great, international investors’ approach so far has been cautious.