Crude futures to boost pricing power

Updated 2018-01-05 10:01:06

Launch vital for increasing nation's influence: experts

The upcoming launch of crude futures contracts in China will help the country, the world's largest crude importer, to boost its status as one of the world's major energy powers, experts said on Thursday.

The comments came after Shanghai-based news portal Jiemian reported on December 27 that trading of such contracts is expected to start on January 18 on the Shanghai International Energy Exchange, a unit of the Shanghai Futures Exchange. It also follows reports in December that a natural gas exchange will be opened in Southwest China's Chongqing.

Originally proposed in 2014, crude futures trading in Shanghai has met with various delays. However, experts and industry players said the rollout of the futures trading - which reportedly can be supported by the domestic currency, the yuan - will help China to gain a stronger foothold in terms of pricing power for the vital commodity.

Yuan-based crude futures contracts will also make a dent in the current global crude market backed by the US dollar, though that may take a long time, they said.

Song Shiwei, an employee at Zhejiang Topchance Petro-Chemical Co, a trader of petrochemical materials, said the trading of crude futures in China will give the nation more power to lock in crude prices.

"It is similar to what the Dalian Commodity Exchange did for iron ore trading. And I also believe yuan-backed crude futures in China will have an impact on the dollar-backed system, though at this stage it is hard to give a quantitative analysis."

Pricing significance

Fan Xinheng, a trader with Shandong Energy International Trading Co, said crude futures trading will be a milestone event.

"Unlike the US and Europe, where the hold of a regional benchmark is strong, Asia still does not have an index that is strong enough. Dubai Crude has its limits. And it is very worthwhile to try to see whether a strong regional index can be established in China, given its status as the world's largest crude importer," Fan told the Global Times Thursday.

China's increased role in the global crude pricing mechanism will also help stabilize global prices at times when there is a sharp fall, noted Fan.

Chen Ruibi, chief energy analyst at Shanghai-based Hicend Futures Co, said that the development of rubber, copper and iron ore futures in China in the past has shown that oil futures contracts in Shanghai stand a good chance of promoting China's status as a global energy power.

"However, the opening of futures trading does not guarantee it will become successful. And a futures market needs time to grow," Chen told the Global Times on Thursday.

"In the future, if the market can draw a lot of trading interest, it will significantly boost China's pricing power in international crude," Chen said.

Chen said greater pricing power could effectively help China to address issues such as the Asian Premium, a situation in which imported crude is sold to Asian countries at a higher price than for the US and Europe, due to the less mature market in the region.

Jin Lei, an associate professor at the China University of Petroleum, said that China's influence on crude and gas pricing has been rising steadily in recent years, in part due to the country's efforts to diversify its supply structure as the country is now heavily reliant on imports of both oil and gas.

"From a long-term point of view, China can hope to attain a dominant role in global crude pricing through measures including financial arrangements and diversified supply. In the short term, the US, Europe and OPEC [the Organization of the Petroleum Exporting Countries] will still determine crude prices," Jin told the Global Times on Thursday.

Jin said crude futures trading needs time and its success will be measured according to the types of traded products, trading volume and entities.

China is also working with countries such as Russia and other crude exporting countries to explore settlement in yuan but also backed by gold, and this will make a dent in the dollar-backed crude trading system, according to Jin.

"China's status as the world's second-largest oil consuming country will exert a gradual influence on the global crude markets. If China cannot wield its influence, it will face adverse effects in terms of energy security," Jin said.

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