China is set to launch its long-awaited crude futures contract on March 26, the country’s security regulator said on Friday, as Beijing seeks to extend its influence over the pricing of oil barrels sold into Asia.
Over the past decade China has emerged as a major force in the oil market and last year it surpassed the US as the world’s biggest crude importer, taking in 8.4 million barrels a day.
Having already demonstrated itself as a massive buyer and seller of physical oil barrels, particularly those from the Middle East, China is now trying expand its clout over paper markets.
The China Securities Regulatory Commission announced the start date saying it had “considered every factor”, with the move aiming to establish the first Asian benchmark for oil deals.
The contract will trade on the Shanghai International Energy Exchange, known as the INE and a unit of the Shanghai Futures Exchange, and will allow Chinese buyers to lock in oil prices and pay in local currency.
China hopes to have a foothold in the trillions of dollars traded each year in oil futures contracts. The creation of this benchmark was envisaged years ago. But it has run into delays as approvals were needed from multiple government entities and as Chinese financial market turbulence raised concerns about the country’s ability to handle volatility.
If successful, the new contract could shift some control, away from dollar-based international benchmarks, to more closely reflect the crude grades consumed by local Chinese refineries.
West Texas Intermediate futures are used to derive physical crude prices in the US and elsewhere in the Americas, while the Brent benchmark has been used to price Middle Eastern, European and Asian crude. Still, to upend the oil market, the new benchmark would have to ultimately gain traction among international oil companies and traders, who have questioned if there will be enough liquidity to make it a global marker.
Sceptics also point to state interference in capital markets and influence on the country’s currency. There are also questions around the crude grades that make up the benchmark.
But Middle Easten producer nations will still be watching closely as they could, in time, face pressure from their Chinese buyers to adopt this benchmark for pricing physical crude contracts.
“For Gulf countries, and others such as the Iraqis and Iranians, this is their worst nightmare,” said one industry executive. “They could be handing pricing power to their major buyer”.
The INE has previously said it will make seven different oil grades deliverable against the contract, including one domestically produced Chinese crude and six from the Middle East.
These will be delivered into a free-trade zone and held in bonded storage until the oil is taken on to domestic or overseas refineries, which traders have said could increase transportation costs