China extends its influence on the crude oil market to pricing

Reuters

Reuters

And demand for yuan from foreign investors eager to participate in the Shanghai International Energy Exchange will boost the currency's value and divert trading away from the dollar.

"The market is reacting to news that global trade war tensions are easing and geopolitical risks are escalating, but that doesn't mean concerns have diminished over rising US output and supplies", Will Yun, a commodities analyst at Hyundai Futures Corp., said by phone from Seoul. U.S. West Texas Intermediate (WTI) crude futures fell 26 cents to $65.62.

The skeptics say that capital controls, regulatory risks, and state intervention in other Chinese securities have made investors distrustful about the possibility that Shanghai futures will become a regional factor for pricing.

Crude was also squeezed by a rise in the number of USA rigs drilling for oil to a three-year high of 804, implying further rises in production, which has already jumped by a quarter since mid-2016 to 10.4 million barrels per day.

Few analysts doubt that Asia is overdue a financial oil price benchmark, and that China with its vast consumer and production base is a prime location for it.

First-day enthusiasm saw 20 million barrels of September oil changing hands in Shanghai by the 3:00 p.m. (0700 GMT) close, but it's not clear the pace will hold in the night session, which runs from 9:00 pm to 2:30 am, or on into coming days. Steep price rises relented when China intervened with tighter trading rules, higher fees and shorter trading hours. The daily average is about 285,000 for March. Yuan-denominated contract begins trading in Shanghai Monday.

It wasn't a febrile start to trading, which may be exactly what the Chinese authorities intended. The daily cost to store crude for delivery into the Shanghai exchange is set at 0.2 yuan a barrel, or at least twice the rate elsewhere, in a move seen as deterring excessive price swings.

Supply curbs by Opec, Russia and their allies have helped push Brent above US$70 this year for the second time since late 2014, but analysts said this strength may not persist long. Other participants included Freepoint Commodities, BOCI Global Commodities and North Petroleum International.

To attract more foreign participation, China will waive income taxes for overseas individuals and institutions.

While the country hopes to establish a benchmark for global oil transactions, whether the Asian nation will achieve that goal has been the subject of hot debate.

A state-led market is one of the main barriers to success for the INE contract, according to Fitch Group's BMI Research.

Russian Federation needs much lower oil prices to balance its budget than OPEC's leader Saudi Arabia, which is preparing a stock market listing for national energy giant Aramco this year and would hence benefit from pricier crude. Similar hurdles have kept foreign investors as bit players in China's giant stock and bond markets.

Latest News