Shanghai crude futures roar into action as global…

29 March, 2018, 01:56 | Author: Sheri Evans
  • Reuters

Analysts said western oil traders were attracted to Shanghai's oil contracts for the potential arbitrage between China's market specifics and global oil fundamentals as reflected by U.S. West Texas Intermediate (WTI) and worldwide Brent crude futures. "We take the view that the contract is viable and adds to the crude oil trading value chain, and is here to stay", said Kevin Tan, executive vice president at Singapore-based brokerage Straits Financial Services.

In the 4-hourly timeframe, WTI failed to break the January highs of 66.50.

This weighed on crude oil futures as well.

WTI crude is the main benchmark for USA crude grades and a crucial hedging tool for the US oil industry.

"The fact that the government is encouraging the exchange and also is not shy about stepping in to occasionally change the rules may discourage global players", Brown said.

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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. Swiss-based commodity traders Trafigura and Mercuria, U.S. -based Freepoint, and independent refiner Shandong Wonfull were other early participants.

Oil traded above $65 a barrel as easing fears of a global trade war offset concerns over rising USA crude stockpiles, boosting prices to near the highest level this year.

China's desire to open a domestic market to trade futures has grown as the nation's crude oil imports have boomed.

Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore, said there was "considerable resistance" to extending the deal as current, or higher, prices could entice even more USA shale producers to come back online.

As for geopolitical tensions, there was said to be an escalation on one front and an easing on another: supporting prices somewhat on Monday was Saudi Arabia air defences shooting down seven ballistic missiles fired by Yemen's Iran-aligned Houthi militia on Sunday, some of which targeted Riyadh.

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XM investment analyst Andreas Georgiou said that if the EIA's weekly report shows a smaller than expected rise in inventories, or a drawdown, prices could be supported.

The long-awaited step evoked a surge in global prices for oil with Brent Crude soaring to $71 a barrel for the first time since 2015.

In dollar-terms, that puts Chinese crude prices significantly below Brent and only slightly above US WTI.

The first trading session saw a total of 62,500 contracts with more than 62 million barrels of crude traded for a notional volume of almost 27 billion yuan ($4 billion), Zerohedge reports. The contract closed at 429.9 yuan per barrel ($68.22).

"We continue to call on all parties, including the Houthis, to return to political negotiations and move toward ending the war in Yemen", she said in a statement.

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By 11:14 a.m. (0314 GMT), 3,599 lots of the most-active June contract had traded, equivalent to 3.6 million barrels of crude.

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