Chinese oil futures launch may threaten primacy of US dlr

China's first long-expected crude oil futures has started trading on the Shanghai International Energy Exchange Monday, with the front-month September contract being the most actively traded in the first morning session, according to data from INE's website. Denominating oil contracts in yuan would promote the use of China's currency in global trade, one of the country's key long-term goals.

Meanwhile, Chinese commodities markets' reputation for high volatility, and the fact that the contracts are denominated in yuan, not dollars, could damp worldwide investors' appetite for the futures.

Meanwhile, the two major U.S. dollar-based oil benchmarks, Brent in London and West Texas Intermediate (WTI) in NY, were trading at US$70.81 and US$66.18 a barrel respectively.

China's treasury bond futures closed mixed on Monday, with the contract for June 2018 closing 0.05 percent lower at 96.98 yuan (about 15.34 USA dollars).

But foreign investor response to those openings has been tepid, and while analysts say the yuan oil futures will help further internationalise China's markets and increase crude price transparency in Asia, the dollar's position as the world's petro-currency remains solid.

Citing Li Qiang, director of the research center under the Xinhu Futures, the media outlet suggested that the launch of China's own oil futures could be seen as Beijing's attempt to open the country's commodity market to foreign investors. Swiss-based commodity traders Trafigura and Mercuria, U.S. -based Freepoint, and independent refiner Shandong Wonfull were other early participants. About 19 foreign brokers had registered to trade the contracts as of last week, the exchange said. Chinese trader Unipec told Reuters it was the counterparty for the Glencore deal. Absence of a paper market could limit liquidity, as these contracts are expected to be physically settled.

"In the short-term, we believe price fluctuations will reflect domestic crude oil supply and demand".

The Chinese contract traded about $4 a barrel higher than WTI earlier in the day.

Crude oil futures slipped on Monday, but losses were capped by a rebound in stock markets and escalating Saudi-Iran tensions. This is especially important amid the ongoing tariff war between the USA and China.

The Shanghai contract traded higher than its London and NY counterparts shortly after debuting, at 432.2 yuan (USD 68.43) per barrel for September settlement at around 0145 GMT, according to Bloomberg News. Chinese exchanges count each way of the trade - the buy and sell - as two lots.

  • Eleanor Harrison