Chinese oil contract to rival US WTI and UK's Brent is born

Chinese oil contract to rival US WTI and UK's Brent is born

On the first trading day, the 15 listed crude oil contracts changed hands in a total of 42,300 transactions.

China, the world's largest oil importer, is hoping that the yuan-denominated futures will help create a benchmark that reflects Asian markets better than the dominant Western indices Brent crude and West Texas Intermediate.

China's ultimate goal is to create a crude oil benchmark in Shanghai that can help the country wrest some pricing power away from global competitors such as Intercontinental Exchange's Brent contract and the New York Mercantile Exchange's WTI.

As it stands, oil exporters store the revenue from their USA oil sales in Treasury bonds - a process known as "petro-dollar recycling".

"Whether this will have any real bearing on the other crude benchmarks, I'm not quite sure, but traders love a new toy, so I applaud China for bringing in something that could stoke up some volatility", said Matt Stanley, a fuel broker with Freight Investor Services (FIS) in Dubai.

Earlier in the session, prices were lifted by statements from Saudi Arabia, the de-facto leader of the Organization of the Petroleum Exporting Countries (Opec), that production cuts that have been in place since 2017 may be extended into 2019, as well as concerns that the USA may re-introduce sanctions against Iran. Contracts set up by the Dubai Mercantile Exchange a decade ago have not matched Brent or WTI, traded on the Intercontinental Exchange and the New York Mercantile Exchange (NYMEX) owned by CME Group. This compares with global turnover of more than $10 trillion in worldwide oil futures, the world's biggest commodity market. "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.

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Crude was also squeezed by a rise in the number of United States 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.

"We prefer to watch for a while", said one Weifang-based independent refiner.

While it remains to be seen whether they're in it for the long haul, the participation of Glencore, Trafigura and other foreign investors in the contract's debut is a boon.

Over the first 24 hours of its trading, Shanghai's spot crude volumes made up 5% of the global market, versus 23% for Brent and 72% for WTI.

This comes on the heels of the industry in 2016 finding the fewest barrels in 70 years; the IEA believes that while oil market will remain well supplied through at least 2020; after that, the market might struggle to meet growing demand. Our short-term outlook and medium-term outlook on crude oil is bullish. The biggest risk was that the U.S. could re-introduce sanctions on Iran.

Crude oil futures slipped on Monday, but losses were capped by a rebound in stock markets and escalating Saudi-Iran tensions.

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