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The Globalization of Chinese Markets with a Crude Oil Futures Contract

Apr 05, 2018
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Straits Financial is proud to share this special report about the new crude oil futures contract at the Shanghai International Energy Exchange (INE). For clients or prospective clients that would like more information about trading this product, please contact us in the US at +1-312-462-4499 or in Singapore at +64-6672-9669.

A New Era for Crude Oil Priced in Asia

China is internationalizing its financial markets one commodity at a time. In a landmark event for global financial markets, the Shanghai International Energy Exchange (INE) launched a new futures contract on crude oil, the first futures contract in China available for trading to the international audience.

Market watchers would know that the Shanghai Futures Exchange has been working for two decades to list this contract and this is a significant regulatory breakthrough for China, the world’s largest energy consumer.

The INE Crude Oil Futures is based on Medium Sour Crude oil as the underlying product and is expected to have a better reflection of Asian demand because it forms the bulk of China’s crude oil imports as well as its neighbors. The INE contract aspires to closely reflect pricing for Medium Sour Crude sold to Asia, and a contender for a third global benchmark.

In a historic moment for Straits Financial Group, our team managed to broker the deal for Glencore and placed the first transaction on INE. This is a significant achievement for Straits as there were notably many market participants clamoring for the initial deals.

In a commentary provided to Reuters, “we were active with Glencore today and I’ve seen Trafigura in it and Freepoint ... 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 its trading debut, the front-month futures contract jumped more than 6% and in the first 20 minutes of trading 14,000 contracts changed hands. The final volume tally was 40,656 for the day. INE Crude Oil Futures volume eclipsed overnight transactions in Brent on the launch day making the contract liquid from the start and with much higher turnover than expected.

Analysis of the Week’s Trading Activity

Market participants believe independent refineries and other state-owned enterprises may be largely sitting at the sidelines due to uncertainties about warehousing and delivery grades of crude. Once the acceptance of this contract proves successful, and as China gains power over oil prices, and internationalizes the Yuan, some traders believe that the INE Crude Oil Futures contract could take away substantial market share from Brent futures much like WTI futures did in 2015. It is also important for traders to consider trading the DME Oman Crude Oil Futures as the Oman Crude oil is a deliverable grade product on INE, thereby providing potential price interactions and arbitrage opportunities with the Shanghai market.

Prices – INE’s Crude Oil Futures September contract settled at 68.80 USD/barrel (433.80RMB) on day one but was slightly lower by day seven, settling at 64.31 USD/barrel (405.50RMB). This was higher than DME’s Oman Crude Oil September contract which settled on the same day at 63.93 USD/barrel. However, both CME’s WTI Crude Oil September contract and ICE’s Brent Crude Oil September contract settled at 66.77 USD/barrel.

Volumes - Since the launch, volume peaked at 67,198 contracts in the first week of trading. On the same day, WTI futures at NYMEX traded more than 697,000 front-month contracts while Brent futures at ICE traded 149,000 front-month contracts.

Open Interest - Jumped more than 26% on the 2nd day of trading, and 54% on the 3rd, which suggests commercial hedging activity. Open interest has increased every day since the launch but dipped slightly by 7% towards the week’s end. On Tuesday, April 3rd, open interest gained 30% likely implying that some traders had re-established positions after reducing them at the end of the week prior; amidst friction with China and US trade policies. Even so, open interest is increasing far more than decreasing, indicating another positive sign of traction with genuine underlying interest.

According to Xinhua News, in the first week of trading, the INE registered more than 20,000 trading accounts with 25% of those labeled institutional accounts. So far, a total of 23 overseas agencies have registered with INE to provide brokerage services.

In China, speculators tend to play a much bigger role in adding vibrancy to the markets; creating a deep and liquid market for hedging, arbitraging, and speculative trading. As Yuan-denominated contracts play a key role in RMB internationalization, the INE Crude Oil Futures marks the beginning of a gradual opening up of the Chinese markets. In a country where financial markets are harder to access, the apparent success of this product signals to traders that China is ready for more Yuan-denominated contracts, foreign participation, and sophisticated trading.

Access to a Full Spectrum of Energy Products through Straits Financial

Straits’ international offices provide clients direct access to trade at the Shanghai International Energy Exchange. Our global offices support China and Asia’s vast commodity derivative markets and enables international participants to trade the Chinese markets for the first time.

Local trading hours for INE Crude Oil Futures  are 9:00am-11:30am and 1:30pm-3:30pm. Trading margins are set at 7% contract value while upward and downward trading limits are set at 5%. For further details on the contract specifications please click here.

The INE Crude Oil Futures adds to a full suite of products and services offered by Straits Group in the energy space, including brokerage of physical trades, bilateral OTC trades, OTC-cleared products, as well as futures and options. Accessibility and arbitrage opportunities can be effectively captured through a single trading account with Straits Financial.

Being among the first approved overseas intermediary brokers for INE, Straits Financial Group continues to be at the forefront of market developments, and our commitment is focused on connecting clients to global markets. International participants who are interested in trading the Chinese markets can confidently rely on Straits Financial Group to help guide and navigate through unfamiliar rules and complex regulations in China.

For more information or any further questions you may have please visit us online at www.straitsfinancial.com.

DISCLAIMER. This document is issued for information purposes only. This document is not intended, and should not under any circumstances to be construed as an offer or solicitation to buy or sell, nor financial advice or recommendation in relation to any capital market product. All the information contained herein is based on publicly available information and has been obtained from sources that Straits Financial believes to be reliable and correct at the time of publishing this document. Straits Financial will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Past performance or historical record of futures contracts, derivatives contracts, and commodities is not indicative of the future performance. The information in this document is subject to change without notice.